Euro Growth Indicator May2014
|Quarter||2012 :03||2012 :04||2013 :01||2013 :02||2013 :03||2013 :04||2014 :01||2014 :02|
|Euro Growth Indicator||-0.79||-0.60||-0.59||-0.93||0.07||0.85||1.29||1,25|
Eurogrowth Indicator predicts weakening momentum in a weak Euro Area recovery
by Paavo Suni
The Research Institute of the Finnish Economy, ETLA
on May 2, 2014
The Eurogrowth Indicator points to a moderation of the Euro Area GDP growth in the first half of 2014. The forecast quarter-to-quarter growth rates are 0.6 and 0.3 per cent. Having risen by 0.1 percentage points in April, the second quarter estimate returned to the level forecast in March 2014.
The second quarter QOQ estimate was drawn down mainly by a drop in the contribution of industrial survey. The positive contribution of industrial confidence diminished quite strongly. On the other hand the contribution of household confidence, which has had a long-lasting strongly negative impact on the Indicator and troughed in the first quarter of 2013, is forecast to continue its improvement. The strengthening of the euro vis-à-vis the USD since the fall 2013 has weakened the Indicator only slightly.
The positive QOQ growth rates of the Euro Area GDP since the second quarter of 2013 translate into high year-on-year rates for the first half of 2014. The forecast annual growth rates rise to 1.3 per cent for both quarters, compared to 0.5 per cent in the last quarter of 2014.
All in all, the weak recovery since the second quarter in 2013 seems not to be gaining momentum in quarter-to-quarter comparison. On the contrary, the substantial weakening of industrial managers’ confidence undermines the growth.
One obvious explanation for managers’ deteriorating mood is the escalation of Ukrainian crisis in early 2014. The US and the EU countered the annexation of the Crimean peninsula to Russia in March 18 by imposing sanctions against Russia. So far sanctions have not been very harmful either for the US or for the EU, but the Ukrainian crisis and the related increasing uncertainty are already taking their toll on the Russian development and Russian-linked business. However, the main issue for the Euro Area industrialists is the possibility that the crisis could develop into a trade war, which could strongly damage all parties’ economic development.
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.