Weak momentum in Euro Area growth

The Euro Area growth remains weak in the second and third quarters of 2014 according to the Eurogrowth Indicator calculated by the Euroframe group in August 2014. The forecast quarter-to-quarter growth rates are 0.3 and 0.4 per cent, which translate to 0.9 and 1.2 per cent in year-to-year comparison. The estimates are unchanged from the previous calculation in July.

The predicted growth is quite fragile as the contribution of industrial survey is weakening rather strongly, probably reflecting the rising uncertainty due to widening conflict in Ukraine, very low inflation environment and sluggish industrial growth in Germany. On the other hand the growth has been supported by the households’ improving confidence since late 2012, which obviously reflects improving labour markets and recent measures of the ECB aimed at revitalising lending. The growth impacts of construction survey and real euro-dollar exchange rate remained rather neutral. The weakening of the euro vis-à-vis the USD in the summer will support the growth with a lag.

All in all, the weak recovery since the second quarter in 2013 seems to remain fragile and sluggish, as the substantial weakening in industrial managers’ confidence undermines the growth momentum. The rising tensions between Russia, the EU and the US in the context of crisis in Ukraine are already increasing uncertainty with a negative impact on the Russian economy and Russian-linked businesses in other countries. If the crisis will develop to a trade war with rising energy prices, the effects would be very damaging to economic developments across the world.

August 5, 2014
Paavo Suni
The Research Institute of the Finnish Economy