The indicator-based model for quarterly GDP growth for the euro area, developed by the European Commission’s Directorate General for Economic and Financial Affairs, forecasts a range of 0.2% to 0.6% for the third quarter of 2005 and a range of 0.4% to 0.8% for growth in the fourth quarter of 2005. These forecasts are unchanged compared to the previous release.




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Next publication of euro area GDP Indicator scheduled for 15 November 2005.

The model

The model, developed by Directorate General for Economic and Financial Affairs of the European Commission, which leads to these forecasts, consists of separate single equations for each forecast quarter. The explanatory variables describe real economic activity or its assessment in opinion surveys and financial variables, both for the euro area and the US.

The real variables are: (1) Car registrations in the euro area. (2) Private consumption in the euro area as reflected in the opinion survey on the present business situation in the retail sector. (3) The construction sector in the euro area as reflected in the construction confidence survey indicator; and (4) The US ISM (Institute of Supply Management) index of the manufacturing sector reflecting the importance of economic integration at the world level.

There are two financial variables: (1) The relative yield spread between the euro area and the US represents monetary conditions and international financial links; and (2) The real effective exchange rate is an indicator of the competitive position of euro area exporters.

Reflecting the unavoidable uncertainty surrounding all such prediction, the forecasts are presented as ranges rather than as point estimates. The model in-sample mean absolute forecast error was 0.15 % under the original release calendar. At the moment of publication of Eurostat's flash estimate, the release calendar is advanced by about 25 days. Forecast ranges have been conservatively widened to ±0.2 percentage point with a view to reflecting the increased uncertainty associated with an advanced forecast and to avoiding a change in the range width due to rounding conventions when the range crosses the zero line.

To facilitate interpretation of the forecasts, it is useful to recall that the average quarterly growth rate in the euro area in the nineties was 0.5 %. The sharpest fall was –0.7 % (first quarter of 1993) and the fastest increase 1.5 % (first quarter of 1992). Tests suggest that the success rate in forecasting acceleration/ deceleration/no change for the first quarter is 76 % and 68 % for the subsequent quarter.

The model is described in detail in DG ECFIN's Economic Paper no 154, June 2001, to be found on DG ECFIN's website:

http://europa.eu.int/comm/economy_finance/publications/economic_papers/economicpapers154_en.htm

Previous releases of the indicator-based model forecasts can be found on:

http://europa.eu.int/comm/economy_finance/indicators/euroareagdp_en.htm

  


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