Euro Growth Indicator

Euro Growth Indicator October 2018

 

 

Quarter 2017 :01 2017 :02 2017 :03 2017 :04 2018 :01 2018:02 2018 :03 2018:04
Euro Growth Indicator 2.0 2.5 2.9 3.0 2.7 2.2 1.9 1.5
Eurostat 2.0 2.5 2.8 2.7 2.4 2.1    

 

 

Growth in the euro area decelerates

by Klaus-Jürgen Gern

IfW Kiel

on October 1st, 2018

Growth in the euro area is expected to gradually slow down further towards the end of the year. After the strong economic expansion experienced through 2017, growth has already moderated markedly in the first half of this year, from around 0.7 per cent per quarter to 0.4 per cent. According to the October Euro Growth Indicator calculated by the EUROFRAME group of economic research institutes, with only marginal revisions from the September release, growth in the third quarter will again come in at 0.4 per cent and decelerate further to 0.3 per cent in the fourth quarter. On a year-over-year basis, growth would decline to 1.9 per cent and 1.5 per cent in Q3 and Q4, respectively, down from 2.1 per cent in the second quarter and 2.7 per cent in the fourth quarter of last year.

The continued gradual decline of the Indicator growth estimate in the fourth quarter reflects a further deterioration of sentiment in the industrial sector, which affects the Indicator coincidentally. Construction survey results, which impact on the Indicator with a long lag of five quarters, by contrast contribute positively to the indicator estimate, especially in the third quarter. Also consumer confidence (lagged by one quarter) has improved and has a moderate positive impact on the indicator in both quarters. The exchange rate, which enters the Indicator with a lag of two quarters, has a slight negative contribution in the third quarter but a small positive one in the fourth quarter.

All in all, the October 2018 Euro Growth Indicator suggests that the euro area economy continues to lose steam. With growth momentum already substantially reduced, the risk that the euro area economy stalls in response to negative shocks seems to have increased. Potential sources of negative surprises abound, including a further escalation of international trade conflicts, failure to agree on an orderly exit of Britain from the European Union, or a substantial further increase in oil prices as a result of the implementation of sanctions on Iran.

 

Indicator methodology

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.

 

For any further information, please contact Hervé Péléraux
You may find this information in other languages: French

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