Euro Growth Indicator November 2018
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Euro area GDP growth expected to decelerate by the end of the year
by Catherine Mathieu
on October 2nd, 2018
According to the preliminary flash estimate released on 30 October by EUROSTAT, euro area GDP grew by a mere 0.2 per cent in the third quarter of 2018. This is well below the 0.4 per cent growth anticipated by the EUROGROWTH indicator calculated by the EUROFRAME group of economic research institutes as well as by a large number of forecasts. Not all EMU countries have released so far their preliminary GDP estimate, but with French GDP having grown by 0.4 per cent, Italy by 0 per cent and Spain by 0.6 per cent, the euro area figure published by EUROSTAT implies GDP growth decelerated elsewhere in the euro area. This is likely to have been the case in Germany, where industrial production growth decreased sharply in the summer, and more especially in the automotive sector which was negatively affected by the implementation of the new EU-wide WLTP (Worldwide Harmonised Light-Duty Vehicle Test Procedure). However, this effect is expected to be temporary and to be followed by a rebound in car production towards the end of the year and in early. Such temporary effects cannot be perfectly captured by leading indicators based on survey data, but may well amount in the third quarter of 2018 to close to 0.2 per cent of euro area GDP.
According to the EUROGROWTH indicator, euro area GDP growth would decelerate from 0.4 per cent in the third quarter to 0.25 per cent in the fourth quarter. The continuation of the deterioration of sentiment in the industrial sector, which plays coincidentally in the indicator, and to a lesser extent the deterioration of the confidence in the construction sector (which plays with a five quarter lag) would contribute to lower GDP growth in the fourth quarter. Households’ confidence (which plays with a one-quarter lag in the indicator) would remain almost unchanged, while there would be a small positive contribution of the euro exchange rate vis-à-vis the US dollar (which plays with a two-quarter lag in the indicator).
On a year-over-year basis, euro area GDP growth would come down from its previous peak of 2.7 per cent in the last quarter of 2017 to 1.2 per cent only in the fourth quarter of 2018. On top of the uncertainties already there for several months including those at the world level related to international trade tensions, geopolitical risks maintaining oil prices at around 80 dollars per barrel Brent, and the uncertainties about a Brexit deal being reached before the end of the year, downside risks have been mounting more recently in the euro area as the presentation of the Italian budget led to a rise in interest government bonds’ rates. Downside risks to euro area short-term growth seem to have increased in the recent past.
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.