Euro Growth Indicator January 2017
|Quarter||2015 :02||2015 :03||2015 :04||2016 :01||2016 :02||2016 :03||2016 :04||2017:01|
|Euro Growth Indicator||2.3||2.4||2.2||1.6||1.9||1.8||1.9||2.1|
Upturn in the euro area gathers pace
by Klaus-Jürgen Gern
on January 9th, 2017
Growth in the euro area seems to strengthen, according to the January estimate of the Euro Growth Indicator calculated by EUROFRAME. The indicator forecasts 0.7 per cent growth in both the fourth quarter 2016 and the first quarter of 2017, following the more moderate rate of 0.3 per cent recorded by Eurostat for the preceding two quarters. The Indicator estimates have been revised up from December by 0.12 and 0.19 percentage points, respectively. On a y-o-y basis this would translate into growth of 1.9 and 2.1 per cent in Q4 and Q1, respectively, compared to growth rates in the range of the 1.8 percent achieved in the summer semester 2016.
The upward revision in the quarterly growth estimates is almost entirely due to a significantly improved economic sentiment in the industrial sector, which affects the Indicator coincidentally. Contributing to the acceleration of growth from the third to the fourth quarter is also an improvement in household confidence, which is entering the Indicator with a lag of one quarter. In both quarters there is a moderate positive impact on growth from a better assessment of the economic situation in the construction sector (five quarters ago). The contribution of the exchange rate is turning from slightly negative in Q4 to slightly positive in the first quarter of this year, reflecting the recent devaluation of the euro against the US-dollar.
All in all, the January Euro Growth Indicator suggests that widely expected negative consequences from the Brexit decision and from uncertainties associated with the change in the US administration will not be visible in euro area growth for the time being. The current benign perception of the economic environment may, however, quickly change given the long list of risks to the outlook which in addition to the aforementioned political uncertainties stem from a variety of factors, including unresolved banking problems in the euro area, financial stress in connection with rising interest rates in the US, or a potential shock to inflation from higher energy prices in response to the OPEC-Russia understanding to cut oil production.
The Euro Growth indicator forecasts the euro area GDP quarterly growth rate two quarters ahead of official statistics using a bridge regression. Regressors are chosen among survey data and financial data, i.e. series which are rapidly available and not revised. The monthly series are converted to a quarterly basis by averaging their monthly values. Series selection is conducted on an econometric basis starting from the set of monthly business and consumer survey results released by the European Commission: industry, construction, retail trade, services and consumers. From this large dataset, a few series are significant stemming from industry (production trend and expectation), construction (confidence indicator) and households surveys (major purchases). Two financial series are also significant, i.e. the growth rates of the real euro/dollar exchange rate and of a Euro area stock market index.
Some of these regressors are leading by at least two quarters, and may be used as such to forecast GDP growth. Some others are not leading or are leading with a lead which does not suit a two-quarter-ahead forecast horizon. These series have to be forecast, but over a short time-horizon which never exceeds four months. All these forecasts are implemented using monthly autoregressive equations.
The Euro Growth indicator is run each month, soon after the release of business and consumer survey results.