Euro Growth Indicator June 2014
|Quarter||2013 :02||2013 :03||2013 :04||2014 :01||2014 :02||2014 :03|
|Euro Growth Indicator||-0.94||0.06||0.85||1.30||0.89||1.30|
Outlook for the euro area: Better but not yet good!
by Joachim Scheide
Kiel Institute for the World EconomyJun 11, 2014
Comment on the results of the Eurogrowth indicator in June 2014
The euro area economy has shown some growth during the past four quarters. However, the expansion was still very modest and the divergence among the member countries continues to be huge. According to the June estimate of the Eurogrowth indicator, we can expect that the positive trend will continue. The forecast is that real GDP will increase by 0.3 and 0.5 percent in the current quarter and the third quarter of 2014, respectively.
These rates are a little bit smaller than earlier forecasts. In fact, some of the indicators have lost some strength compared to previous months. Firms in manufacturing are still confident about the future but the optimism has lost some momentum, leading to the small deceleration of growth in the second quarter as predicted by the estimation results. Also, the strength of the euro shows a small negative contribution to the growth prospects. A reason to be a little more optimistic is the result from the household survey. The sentiment has improved somewhat, probably due to the stabilization on the labor market in several countries. The other indicators showed only minor changes.
All in all, the forecast still implies that the recovery will gain some strength this year, but some caution is warranted. The indicator has been a little bit too positive compared to the actual outcome of the first GDP estimates by Eurostat. It may be the case that sentiment indicators have lost some of their power of explaining or predicting actual growth. Furthermore, it is obvious that the cyclical situation varies a lot among member countries. The increase of GDP in the euro area during the first quarter can be explained by the strong performance of Germany alone, while the second and third largest economies (France and Italy) are still close to stagnation. In the second quarter there will definitely be a correction for the German economy, so we have to expect that the other countries show stronger growth if the forecast is to be met.
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.