As if to rub salt into the wounds of Europe's death by a thousand-downgrades, Goldman Sachs followed up Germany's decision to drastically cut its growth outlook for 2014 (+1.2% from +1.8%) and 2015 (+1.3% from +2.0%) by slashing its forecast for Europe in Q3 to a triple-dip recessionary -0.15% GDP growth. This is dramatically below an "over-optimistic" consensus of +0.35% as incoming data is notably weaker than expected. The DAX remains well below the crucial 9,000 level (having plunged early in the European session) and bund yields have collapsed to new record lows.
Germany cuts its own forecast...
- *GERMANY SEES 2014 GDP GROWTH AT 1.2%: SAW 1.8%
- *GERMANY SEES 2015 GDP GROWTH AT 1.3%: SAW 2.0%
Which sent DAX and Bund yields tumbling...
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And then Goldman follows up by slashing European growth into a triple-dip recession...
RETINA points to negative real GDP growth in Q3
Bottom line: The flash estimate for Euro area GDP growth for Q3 will be released by Eurostat on November 14. In today's Daily, we present an update of our contemporaneous growth and inflation tracker, RETINA. Since our latest update (September 19), RETINA's median estimate of activity has moved into negative territory, hovering around -0.15%qoq since end-September. Overall, RETINA continues to see downside risk to our (revised) +0.1%qoq judgemental forecast for Q3 GDP, in line with depressed market sentiment on the outlook for European growth.
RETINA's latest take on Q3
The RETINA framework provides an econometric methodology that filters incoming information from high frequency indicator variables in order to track the evolution of real economic activity in the Euro area, summarised in the form of a 'nowcast' of the next quarterly real GDP growth print.
In a recent European Views (complete with methodological annex), we described the statistical approach that underpins RETINA. In today's Daily, we focus on RETINA's implications for Euro area activity (and inflation) in Q3 2014 -- particularly the evolution of momentum since our last update on 19 September. There are six key messages:
1. RETINA sees Q3 GDP moving into negative territory, below our (revised) +0.1%qoq judgemental forecast
At the end of September, RETINA's median estimate for third-quarter GDP growth (the red line in Chart 1) settled at around +0.1%qoq, following a sharp fall driven by the weak Italian IP reading for July. Since then, this median continued to drift downward to -0.15%qoq, and now hovers around that level.
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This compares with our (revised) judgemental forecast of +0.1%qoq (the black dotted line in Chart 1) and a consensus among other private-sector economists (polled on 8 September) which stands at +0.35%qoq.
2. RETINA turned negative after weak outturns for Euro area export and consumer confidence
Since we last updated RETINA in mid-September, a mix of survey indicators and hard data was published throughout the Euro area. These releases have mainly surprised to the downside. Not surprisingly, RETINA's median estimate for third-quarter GDP growth -- which was already close to zero -- has fallen in this context, reaching negative territory on account of developments in Euro area exports and the Euro area consumer confidence survey. As Chart 2 shows, these two series each subtracted 10 basis points from RETINA's median estimate. Survey and hard data published subsequently have largely confirmed the weakened momentum of the Euro area economy. Despite the focus placed on them in the media, conditional on the particularly bad outturns for exports and consumer confidence, the weak industrial production figures for August and PMI surveys for September moved RETINA only marginally.
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3. RETINA suggests downside risks to our new judgemental forecast
As Chart 3 below shows, RETINA's growth tracker has consistently implied downside risks to our judgemental forecast for Q3 GDP over the past few months. The Bayesian underpinning beneath RETINA's growth tracker allows us to quantify this skew. Chart 3 shows the model-implied probability that Q3 growth beats our judgemental forecast.
On October 3, we revised downward our forecasts of GDP growth in the third quarter from 0.4%qoq to 0.1%qoq, as incoming data were weaker than we had expected earlier in the year. Despite this downward revision to the judgemental forecast (reflected in the jump in Chart 3), downward risks remain: RETINA still points to 70% chance that growth will fall short even of our new, lower judgemental forecast.
4. RETINA's modal estimate of Q3 growth has decreased significantly over the past month
So far, we have discussed RETINA's median tracking estimate. We can also track RETINA's modal estimate of GDP growth - that is, the single estimate of sequential growth that the models deem more likely. As Chart 4 shows, this modal estimate has decreased significantly since a month ago and is now negative.
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5. RETINA suggests that consensus for Q3 and Q4 looks still over-optimistic
Chart 5 illustrates how our judgemental forecast and the consensus among private-sector forecasters compare with a confidence interval drawn around our RETINA median tracking estimates.
At +0.1%qoq, our judgemental forecast for Q3 exceeds a 25% confidence interval around RETINA's current, model-based median estimate of likely GDP growth, but stands below the forecast made by the latest consensus poll (+0.35%qoq). (The consensus forecast reflects a survey conducted by Consensus Economics in early September, and thus does not factor in the conjunctural indicators released beyond that date).
For Q4, while the consensus forecast still looks overoptimistic at 0.3%qoq, our judgemental forecast -- at +0.1%qoq -- has moved closer to RETINA's 10% confidence interval.
Charts: Bloomberg and Goldman Sachs
