Euro Growth Indicator January 2020
|Quarter||2018 :02||2018 :03||2018 :04||2019:01||2019 :02||2019:03||2019 :04||2020:01|
|Euro Growth Indicator||2.3||1.8||1.2||1.2||1.1||1,2||1.1||1.0|
Slightly improved outlook for growth in the euro area
by Klaus-Jürgen Gern
on January 9th, 2020
Euro area growth is likely to strengthen somewhat in the beginning of 2020 after another quarter of sluggish growth in the final months of last year, according to the January Euro Growth Indicator calculated by the EUROFRAME group of economic research institutes. GDP is forecast to increase by close to 0.4 per cent in the first quarter of this year, a notch higher than the pace of 0.2 percent that is suggested by the Indicator for 2019Q4 and has been recorded by Eurostat for the second and third quarters of 2019 as well. On a year-over-year basis, growth would stabilise at around 1 per cent in the first quarter.
The improvement in the Indicator for 2020Q1 is mainly due to a stabilisation of confidence in the industrial sector which had been a significant drag on the growth estimate between mid 2018 and the end of last year. The other components of the Indicator have shown little movement: Consumer confidence (lagged by one quarter) continues to impact slightly negatively on the GDP growth rate in both quarters, while the contribution of construction survey results, which plays with a long lag of five quarters, remains positive. A small positive contribution is also coming from the real euro/dollar exchange rate, which enters the indicator calculation with a lag of two quarters.
All in all, the Euro Growth Indicator suggests that the soft patch in euro area growth could gradually be overcome starting in the beginning of this year. With industrial production seeming to have bottomed, for the time being chances have improved that the rest of the economy, which has so far been relatively robust, will remain on track. In that case a serious deceleration of growth that would also negatively impact on total employment should be avoided. However, risks for the outlook still abound, including from higher oil prices as a possible fallout from increased tensions in the Middle East and the lingering threat of trade conflict with the US. Negative surprises could easily lead to a renewed loss of confidence in the industrial sector and derail the budding recovery of growth in the euro area.
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.