LONDON (voxEU.org) -- In August 2007, when the euro area was first hit by the worst financial crisis after the Second World War, its economy already displayed signs of cooling from the peaks reached in 2006.
EUR-coin is a real-time, monthly estimate of area-wide GDP growth, computed each month by the staff of the Banca d'Italia. In this column we address two related questions:
- How did EUR-coin track the loss in momentum in euro area growth over the last two years?
- Is a conjunctural indicator like EUR-coin reliable in a situation like the current one, in many respects markedly different from the more recent historical experience?
EUR-coin tracking of the current cyclical downturn in the euro area
Synthetic cyclical indicators - like EUR-coin - are designed to portray in a single figure the economic situation by "properly" weighting the available information. According to EUR-coini, euro area growth cycle peaked in 2006, when the indicator estimated the underlying growth to be around 3.5% on an annual basis (Figure 1).
Figure 1. EUR-coin
In the second quarter of 2007, euro area growth began to lose momentum; however in July, right before the effects of the financial crisis stemming from the US subprime mortgage market began to spread, euro area trend growth was still estimated close to 3%. From August 2007, financial and survey data - that account for roughly one-third of the data series used to produce EUR-coin - quickly reflected the deterioration in the financial markets and the growth outlook worsened further. EUR-coin dropped to 2.0% (on an annual basis) by the end of last year and bottomed at zero in October 2008, its lowest level since 1993. The only exception to EUR-coin's steady decline since the start of 2007 was a small rebound last spring due to a spurt in industrial productions and a slight improvement in the survey data.ii
Figure 2. Euro area
However, as in all economic downturns, the current one did not occur simultaneously across macroeconomic variables. Quantitative data, like industrial production or unemployment, showed clear signs of a slowdown in the euro area only in the first quarter of this year when the unemployment rate began to rise and the industrial production index flattened (Figure 2, upper left panel), several months after the sudden jump in money market spreads had signalled the seriousness of the crisis (see bottom right panel). Survey and stock market data pointed at a deterioration of the economic outlook much earlier than quantitative data (second and third panel). Consistently, since August 2007, business opinion and financial data have been the major driving force of EUR-coin, accounting for the largest part of its decline, while real variables played a minor and, at times, counterbalancing role (as in the second quarter of 2008).
This occurred also in the US, where the financial crisis originated and where its consequences should have been felt sooner and more sharply. Many key macroeconomic time series like employees on non-agricultural payrolls or industrial production showed signs of a weakening in real activity only at the beginning of 2008 (fig. 3).iii Notably though, unlike EUR-coin that declined earlier, the Conference Board coincident index for the US business cycle, whose indications are often in line with the NBER dating committee decisions, did not mark a clear fall until the beginning of 2008.iv
Figure 3. United States
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