Euro Growth Indicator November 2014
|Quarter||2013 :01||2013 :02||2013 :03||2013 :04||2014 :01||2014 :02||2014 :03||2014 :04|
|Euro Growth Indicator||-0.63||-0.72||0.02||0.56||1.25||1.14||0.77||0.68|
Fears of a ‘triple dip’ in the euro area
by Hervé Péléraux
OFCE - French Economic
on November 6th, 2014
According to the EUROGROWTH indicator, growth in the euro area will remain weak at 0.2 per cent in the last two quarters of 2014. The November indicator estimation is roughly unchanged from the former one, displaying only a minor +0.1 percentage point upward revision from last month. On a year-on-year basis, the expansion path would continue to decelerate, from its former peak at 1.2 percent in 2014Q1 to 0.7 in the final quarter of 2014.
This loss of momentum relies mainly on a worsening of industrial confidence indicators since the beginning of the year, after a firm rebound all along 2013. To a lesser extent, the household sentiment indicator downgrades the outlook from a higher contribution in the first half of the year. Furthermore, the past negative developments of the construction survey continue to drag growth with a long lag of 5 quarters. And the recent depreciation of the euro against the dollar does not help much for the end of 2014 given the 2-quarter lagged effect of exchange rate developments on activity. A positive impact of the euro devaluation since May 2014 can therefore be expected in the first half of 2015.
All in all, the Euro area economy is still very fragile. Growth has been slower than anticipated in the turn of 2013 and 2014 and the last confidence indicator developments raise again fears of a new setback of growth. Surely, the crisis in Ukraine partly explains the weakening of growth prospects. However, the core problems of the euro area continue to be costly in terms of growth. Although in a less drastic way, many member countries are still conducting budget consolidation. Furthermore, the impact of the recent ECB’s key rate cut is hampered by the strong downward path of inflation which leads real interest rates to rise. In a context where the financial situation of private and public agents still bears the scars of the crisis, one may fear that demand does not recover rapidly, especially investment.
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.