Euro Growth Indicator July 2014
A sluggish and fragile recovery in the euro area
|Quarter||2013 :02||2013 :03||2013 :04||2014 :01||2014 :02||2014 :03|
|Euro Growth Indicator||-0.94||0.06||0.85||1.30||0.87||1.18|
A SLUGGISH AND FRAGILE RECOVERY IN THE EURO AREA
by Hervé Péléraux
French Economic Observatory, OFCE
on July 4, 2014
According to the July forecast conducted with the Eurogrowth Indicator, real GDP would increase by 0.3 and 0.4 percent in the second and third quarters of 2014, respectively. The forecasts for 2014Q2 have been revised downwards since the first spring estimates, from around 0.4 to 0.3 percent currently.
Moreover, the estimate for 2014Q3, first calculated in June was also revised downwards in July by -0.1 percentage point. Those revisions emphasize that the growth path, which turned positive from the second quarter of 2013 after six quarters of negative GDP growth, remains highly fragile. Given the indicator has been tending to overestimate official GDP growth data released by Eurostat somewhat since 2013Q3, the last indicator developments suggest that risks are tilted to the downside regarding the near term euro area growth.
The downward revisions of the second and third quarter estimates are driven mainly by the contribution of the industrial survey. After a strong turnaround in late 2012, the business climate according to the assessment of firm managers in manufacturing has become less favorable since late 2013. On the other hand, the contribution of households’ confidence to the indicator improved further from its late 2012 trough, partially offsetting the weaker momentum of the manufacturing sectors. Surely, the slight decline in the unemployment rate since one year can be seen as “good news” for households’ and may help to stimulate private consumption. A stronger private demand would be welcome in a context where the prospects for external demand are clouded given a deteriorating outlook in the US and emerging economies. Other factors, such as the confidence in construction and the euro/dollar exchange rate, showed some volatility in the last quarters but should not drag down forecasts up to 2014Q3.
All in all, the euro area outlook for growth at mid-year is still very fragile. The external environment is not as buoyant as in the past. It implies that the euro area has to rely on itself to support the – weak – recovery that emerged one year ago. However, the challenge is far from being won. The financial situation in euro area countries improves slowly while governments continue fiscal consolidation. And the new monetary easing package announced by the ECB in early June cannot guarantee alone a success in terms of recovery in an uncertain environment.
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.