The Wilder View

Follow up to yesterday’s post: Euro area consumption and Investment in Q2 2013

Yesterday I illustrated the unsustainable accounting growth engine of imports occurring in the euro area (EA). Today I’ll present more of a forward looking analysis on private domestic demand within the euro area: consumption and investment. If current levels of real retail sales hold at the euro area level, then the contributions to growth in Q2 2013 will likely be ever so slightly healthier amid a pickup in private consumption.

Consumption Yesterday we received the May 2013 data on euro area real retail sales, of which the quarterly growth pattern (after revisions, which is very important because this index is heavily revised) has a 70% correlation with euro area real private consumption. A simple bivariate regression predicts that real consumption will grow 0.3% in the second quarter of 2013, holding all else equal and provided the level of real retail sales does not change in June. This would be a material increase from its meager 0.04% contribution to real GDP growth in Q1.

Gross Fixed Capital Formation The other part of private domestic demand is gross fixed capital formation (GFCF, or investment less inventory build). There is no real monthly indicator that I know of to forecast quarterly GCFC growth, so I look at the industrial confidence index released by the DG ECFIN (which aggregates various local statistical agency surveys). Euro area industrial confidence has a 70% correlation with GFCF growth, where a simple bivariate regression predicts that GFCF will contract at an 0.8% pace in Q2 2013. This is less than half the rate of contraction seen in Q1 2013.

Amid an expected increase in real consumption, I’d say that there’s some scope for a slower pace of decline for GDP in Q2 2013 and a slightly healthier composition of growth contributions. However, as a sticking point real retail sales are heavily revised and global liquidity conditions are tightening, making consumption growth anything but assured.


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