Euro Growth Indicator September 2014
Outlook for the euro area: The recovery that really wasn’t
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Outlook for the euro area: The recovery that really wasn't
by Joachim Scheide
Kiel Institute for the World Economy
on September 5, 2014
The performance of the euro area economy has been disappointing in recent months. After a relatively good start into this year, economic growth slowed down considerably. And the outlook is also not as bright as it was a few months ago. According to the September estimate of the Eurogrowth indicator, we can expect only minor increases of real GDP in the second half of this year: Just 0.2 percent in the third quarter (which is a downward revision of 0.2 percentage points), and a meager 0.1 percent in the fourth quarter.
This deceleration of growth reflects mainly the change of the sentiment in the industry sector. While there had been a strong improvement until the spring, firms have become more pessimistic during the following months. For the first time since the end of 2012, the contribution from this factor is now negative for the second half of this year. The other indicators have not changed much, in fact, there seems to be some stabilization in both the construction and in the household survey. One reason probably is that the labor markets have not deteriorated further, in a few countries there even has been a slight turnaround as far as unemployment rates are concerned.
All in all, the forecast implies that the expansion of economic activity will not really gain any strength this year. Several factors are responsible for this. One is, of course, the geopolitical situation which has become even more severe in recent months. This seems to weigh heavily esp. on the German economy which probably has stagnated at best during the summer half of this year. Also, progress in the second and third largest economies in the euro area (France and Italy) has been slower than anticipated. So the positive surprises, notably in Spain, could not really change the overall picture.
The uncertainty concerning the crisis in Ukraine is not likely to vanish very soon. This had an impact obviously not only on the sentiment but also on hard facts such as orders and production. So the growth rate for this year as a whole will be considerably less than anticipated some months ago. The current weakness will also affect the growth rate for 2015. All in all: This performance can hardly be called a recovery!
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.