Euro Growth Indicator March 2015
|Quarter||2013 :03||2013 :04||2014 :01||2014 :02||2014 :03||2014 :04||2015 :01||2015:02|
|Euro Growth Indicator||-0.1||0.4||1.3||1.2||0.9||0.8||0.9||1.3|
Euro Area growth is slowly gaining traction
by Klaus-Jürgen Gern
on March 5th, 2015
According to the March EUROGROWTH indicator, growth in the euro area will remain at 0.3 per cent in the first quarter of 2015. The indicator result was revised slightly down from the estimation in February (0.4 per cent). The first estimation for the second quarter predicts a small improvement to 0.4 per cent, confirming the modest upward momentum. On a year-on-year basis, the expansion is set to strengthen from 0.9 per cent in the past couple of quarters to 1.3 per cent in the coming quarter. Although moderate by historical standards, this would be the highest rate of growth in four and a half years.
Growth in the first quarter was held back by a deteriorating sentiment in the industrial sector and some moderation in the positive contribution of the household survey one quarter back. At the same time, support came from the real exchange rate which enters the estimation with a lag of two quarters. The substantial devaluation of the euro vis-à-vis the US dollar that started around the middle of last year is now beginning to impact positively on the indicator result. There was also a significant, although temporary, improvement in the construction surveys at the end of 2013. Construction surveys affect growth estimates of the EUROFRAME indicator with a long lag of more than one year.The pick-up of growth in the second quarter is mainly due to an improvement in the household surveys and a further stimulus from the exchange rate.
All in all, the EUROFRAME indicator suggests that the euro area economy will continue to expand going forward. The economy will get increasing support from the exchange rate and the reduced oil price. The ECB’s decision to start asset purchases on a large scale (quantitative easing) is also going to support the recovery, not only through lowering of the external value of the euro but also by pushing up prices for bonds and equities in the financial market. At the same time, however, large parts of the euro area are still struggling with structural adjustment and negative developments such as the serious situation in the Ukraine, the associated political conflict with Russia, and the uncertainty about the prospects for Greece and its membership in the euro zone continue to weigh on the outlook, limiting the upward potential for the euro area economy in the short term.
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.