Eurozone: what does weakening sentiment tell us about
growth?
■
The European Commission now expects 1.3% growth for the eurozone this year, down from 1.9% in its previous forecast ■This
downward adjustment doesn’t come as a surprise, considering the declining trend of several survey indicators ■The recent
performance of these indicators in tracking GDP growth is mixed, which makes the assessment of the current growth momentum
challenging
The European Commission has joined the IMF and private sector
forecasters in revising downwards the growth outlook for the eurozone
this year. GDP is now expected to grow 1.3% versus a previous
forecast of 1.9%. The revision is significant and reflects, amongst
other factors, trade tensions, slower foreign growth, in particular in
China, Brexit uncertainty. By coincidence, on the very same day that
the Commission published its Winter Forecast, the Bank of England
cut its forecast for UK growth this year from 1.7% to 1.2%, which
corresponds to the weakest level since 2009. The cost of Brexit
uncertainty becomes increasingly visible. These forecast revisions
don’t come as a surprise: after all, survey indicators had been
declining for several months in a row. This is illustrated in the charts
which show three important indicators for the eurozone: the European
Commission economic sentiment index (ESI), the Markit purchasing
managers index for the manufacturing sector (PMI) and the IFO
economic climate, which reflects the sentiment of economic experts.
Part of the disappointment of the downward adjustments may come
from expectations which simply had risen too high: at the end of 2017,
there was increasing concern about a possible gap between soft data
EUROZONE ECONOMIC GROWTH AND SENTIMENT (ESI)
GDP, q/q (actual)
GDP estimate based on Economic Sentiment Indicator (ESI), q/q
2
1
0
-1
-
-
-
2
3
4
1995 1998 2001 2004 2007 2010 2013 2016 2019
Chart 1
GDP, y/y
Economic Sentiment Indicator (ESI) [RHS]
6
4
1
1
15
05
(
survey indicators) and hard data (GDP). In order to assess this, a
2
GDP estimate has been constructed based on the historical
relationship between survey indicators and realised GDP. In this
respect, chart 1 shows that the European Commission’s ESI
overestimated growth in 2017 and 2018.
95
0
8
7
5
5
-2
-
-
4
6
…
/…
65
1
995 1998 2001 2004 2007 2010 2013 2016 2019
Chart 2
Source: Datastream, DG ECFIN, BNP Paribas
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