Euro Growth Indicator

Euro Growth Indicator July 2019



Quarter 2017 :04 2018 :01 2018 :02 2018:03 2018 :04 2019:01 2019 :02 2019:03
Euro Growth Indicator 2.9 2.6 2.2 1.9 1.3 1.1 0.8 0.8
Eurostat 2.8 2.5 2.2 1.6 1.2 1.2    



Continued weakness of growth in the euro area

by Klaus-Jürgen Gern

IfW Kiel

on July 20th, 2019

Euro area growth remains sluggish for the time being, according to the July Euro Growth Indicator calculated by the EUROFRAME group of economic research institutes. GDP is forecast to increase by only 0.1 per cent in second quarter of 2019, after the 0.4 percent growth registered by Eurostat for the first quarter of 2019. For the near future no significant pick-up of activity is in sight. The indicator suggests growth of 0.1 percent also for the third quarter. On a year-over-year basis, growth would decelerate to 0.8 per cent in both quarters, down from 1.1 per cent in the fourth quarter 2018 and 2.9 per cent at the end of 2017.

The Indicator estimate is currently dragged down by a significant negative contribution of sentiment in the industrial sector, which affects the Indicator coincidentally. In addition, consumer confidence (lagged by one quarter), which has been relatively robust until the first quarter of this year, is now contributing negatively to the growth rate, albeit only modestly so far. While both elements of the indicator improved slightly in the third quarter compared to the second quarter, the positive impact on the indicator of construction survey results, which impact on the Indicator with a long lag of five quarters, has decreased as well, preventing a noticeable increase of the Indicator estimate for growth from Q2 to Q3.

All in all, the Euro Growth Indicator suggests that the euro area economy continues to lack economic momentum, with little signs of improved outlook for the next couple of months. The modest acceleration of growth in the first quarter proved to be temporary. The economic outlook remains clouded with headwinds from the global economic policy environment, including lingering threat of trade conflict with the US and uncertainties around Brexit, and slower growth in China dominating the picture.


Indicator methodology

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.


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