Euro Growth Indicator May 2016
|Quarter||2014 :03||2014 :04||2015 :01||2015 :02||2015 :03||2015 :04||2016 :01||2016:02|
|Euro Growth Indicator||0.7||0.9||1.2||1.9||2.0||1.9||1.3||1.2|
Euro Growth Indicator does not confirm a strengthening in Euro Area Growth
by Paavo Suni
on May 4th, 2016
The Euro Growth Indicator calculated by the EEUROFRAME group in May 2016 suggests a continuation of moderate GDP growth in the first half of 2016. In quarter-on-quarter terms, the euro area GDP would grow by 0.3 per cent in the first two quarters of 2016 as it did in the third and fourth quarters in 2015. The stable quarterly growth rates forecast for the first two quarters of 2016 correspond to declines of the year-on-year rates to 1.3 and 1.2 per cent from the 1.6 per cent growth in the fourth quarter in 2015.
The Indicator results are unchanged from the previous estimation in April. The household and industrial survey factors continue to be the main drivers of the growth. While the household survey continues to show strong positive contributions, that of the industrial survey turned strongly negative in the first quarter of 2016 dwindling to half in the second quarter. Obviously, higher real disposable incomes as a result of lower interest rates, low prices and rising employment provide strong tail winds to consumption. In case of industrial surveys, which affect the indicator coincidentally, the financial turbulence around the year-end related to the increased uncertainty over Chinese growth prospects seem to have deteriorated both expectations and contributions.
The construction survey, which affects the Indicator with a 5-quarter lag, supports the growth estimate in the first quarter, but the effect fades out in the second quarter. The Indicator is very sensitive to the changes in price competitiveness, measured with the real exchange rate with a lag of two quarters. The contributions have, however, been quite modest since the fourth quarter of 2015.
The Indicator misses the pick-up in euro rea growth to 0.6 per cent (QoQ) in the first quarter, apparent in the recently published Eurostat flash estimate. This may suggest a new moderation of GDP growth after the first quarter. In terms of the model, growth will moderate in the second quarter if the industry surveys estimated contribution does not improve.
All in all, the Indicator predicts continuing modest growth in spite of many favourable tail winds. Increased uncertainty relating to Chinese growth, Brexit and deflationary developments in the Euro area have counterweighted the positive factors and continue to pose risks for growth.
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.