Euro Growth Indicator March 2020
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Euro Growth Indicator shows accelerating growth for the euro area but risks are downside
by Markku Lehmus
on March 3rd, 2020
The March Euro Growth Indicator, calculated by the Euroframe EUROFRAME group in March, suggests that the quarterly growth rate of euro area GDP would be close to 0.6 per cent in the first quarter of 2020. This would imply a markedly accelerating growth from the fourth quarter, when growth was 0.1 per cent, according to the flash estimate provided by Eurostat. The Indicator implies that the year-on-year growth rate would be 1.0 per cent in the first quarter of 2020. The Indicator, however, is based on February sentiment indicators that do not capture yet the negative economic effects induced by the spread of the coronavirus that are currently unfolding.
The Indicator estimate for GDP growth in the first quarter of 2020 is supported by sentiment in the industrial sector, which has been improving until February. Also, growth benefits to some extent from benign sentiment in the construction sector and developments in the real euro per dollar exchange rate. In contrast, sentiment in the household sector contributes slightly negatively to the first quarter Indicator estimate.
The Indicator suggests that euro area growth would stay robust in the second quarter of 2020, implying another 0.6 per cent quarter-on-quarter growth for the euro area. This would convert into growth of 1.5 per cent year-on-year GDP growth in the second quarter. This looks like a very optimistic scenario amid the news of coronavirus-induced negative effects on firms’ supply chains, tourism and world trade and potentially domestic demand.
Sentiment indicator values until February in both the industrial and the household sector as well as the developments in the exchange rate also support second quarter GDP growth. Sentiment in the construction sector, instead, contributes slightly negatively to the second quarter Indicator value. Yet it is the improvement in the industrial sector sentiment which explains the greatest share of the strength of the Indicator estimate for euro area GDP growth in the first and second quarters of this year.
It is, however, clear that the Indicator misses the worrying developments brought about by the spread of the coronavirus. In China, where the epidemic started, February sentiment indicators have declined dramatically signalling a substantial slowdown of the economy, and given the progressive spread of infections across Europe, significant negative effects on economic activity in the euro area seem inevitable. This will almost certainly be reflected in a deterioration of economic sentiment in March and should lead to a substantial downward revision of the Euro Growth Indicator estimates for growth in April.
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.