Euro Growth Indicator November 2019
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Euro area GDP expected to continue to grow by 0.2 per cent only in the fourth quarter of 2019
by Catherine Mathieu
on November 4th, 2019
Euro area GDP grew by 0.2 per cent in the third quarter of 2019, according to the flash estimate released by EUROSTAT on 31 October 2019. This is in line with the Euro Growth Indicator estimate calculated by the EUROFRAME group of economic research institutes last month.
According to the Euro Growth Indicator, euro area GDP will continue to grow by 0.2 per cent in the last quarter of 2019. Industrial sector confidence (which plays coincidentally in the indicator) will remain the main component dragging down output growth, but it would stop from deteriorating, while the contribution of the other variables playing in the indicator would remain unchanged: confidence in the construction sector (which plays with a five quarter lag in the indicator), households’ confidence (which plays with a one-quarter lag in the indicator) and 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 however decelerate from 1.15 per cent in the third quarter of 2019 to 1 per cent in the last quarter. Risks continue to be tilted to the downside, although two major risks have receded in recent weeks. First, the US did not raise further tariffs on Chinese goods in October, contrary to what had been planned in the summer. But it remains to be seen if the US and China reach an agreement on trade and related issues in the coming months. Second, following the agreement reached on Brexit by the UK government and the EU, the official deadline for the UK to leave the EU has been delayed from 31 October 2019 to 31 January 2020. However, here also, if uncertainties around Brexit are currently smaller than they were a few weeks ago, they will persist, at least until the UK general elections due to be held on 12 December. Even if recent indicators, especially in the manufacturing sector, suggest a less deteriorated outlook, euro area output growth is likely to remain sluggish in the coming months.
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.