EcoWeek

PDF
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 doesnt 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  
Markets Overview  
Pulse & Calendar  
Economic scenario  
2
Ecoweek 19-06 // 8 janvier 2019  
economic-research.bnpparibas.com  
A similar conclusion applies when using the PMI (chart 3) although  
the gap has now closed. The IFO indicator tracked growth pretty well  
in 2018 (chart 5)  
depends on whether the external headwinds (Brexit, trade, China) will  
start to lose power. Finally, it is worth referring to recent research by  
the Bank of England which suggests “that during periods of high  
uncertainty the relationship between survey responses and GDP  
growth weakens . This would imply that in the current environment,  
which is characterised by a high level of uncertainty, greater caution is  
needed when interpreting the signal coming from survey data.  
These relationships help to put the recent survey indicators into  
perspective. Despite its decline since the end of 2017, the ESI is still  
at a rather high level but its recent tendency to overestimate growth  
implies that we shouldn’t be too upbeat about the still high level of the  
index. Following its big drop last year, the IFO index has now reached  
a particularly low level, which would not bode well for growth at the  
start of this year. On the other hand, the current level corresponds to  
the one last seen during the eurozone sovereign crisis. Clearly, the  
determinants of final demand and the financial and monetary  
conditions were then far worse compared with today. This provides  
hope that sentiment would start to stabilise although this essentially  
1
William De Vijlder  
1
Bank of England, Inflation Report February 2019, p. 11  
EUROZONE ECONOMIC GROWTH AND PMI MANUFACTURING  
EUROZONE ECONOMIC GROWTH AND EUROZONE IFO  
GDP, q/q (actual)  
GDP estimate based on PMI Manuf. (q/q)  
GDP, q/q (actual)  
GDP estimate based on Eurozone IFO, q/q  
2
1
0
1
2
3
4
2
1
0
-
-
-
-
-1  
-2  
-3  
-4  
1
995 1998 2001 2004 2007 2010 2013 2016 2019  
1995 1998 2001 2004 2007 2010 2013 2016 2019  
Chart 3  
Chart 5  
GDP, y/y  
PMI Manufacturing [RHS]  
GDP, y/y  
Eurozone IFO [RHS]  
6
4
2
0
65  
6
4
7
2
0
0
6
5
5
4
4
3
0
5
0
5
0
5
2
0
-
-
-
2
4
6
-2  
-4  
-6  
-
30  
30  
-80  
1
995 1998 2001 2004 2007 2010 2013 2016 2019  
1995 1998 2001 2004 2007 2010 2013 2016 2019  
Chart 4  
Chart 6  
Source: Datastream, Markit, BNP Paribas  
Source: Datastream, IFO Institute World Economic Survey, BNP Paribas  
QUI SOMMES-NOUS ? Trois équipes d'économistes (économies OCDE, économies émergentes et risque pays, économie bancaire) forment la Direction des Etudes Economiques de BNP Paribas.
Ce site présente leurs analyses.
Le site contient 2179 articles et 574 vidéos