GDP Growth in the Euro Area Exceeds That of the U. S. for the Third Time

Gross Domestic Product in the Euro Area rose 0.89% in the fourth quarter or at an annual rate of 3.59%. These numbers compare with 0.55% and 2.22% for the United States. Although the growth for the whole year was greater in the U.S. than in the Euro Area (3.3% vs 2.6%), growth in the latter was greater than the former in the last three quarters of the year as can be seen in the first chart.

The European Commission is forecasting a range of GDP growth for the Euro Area for the first three quarters of 2007. The high estimates of growth in GDP are 0.8%, 0.9% and 0.9% in the first, second and third quarters. The low estimates are 0.4%, 0.5% and 0.3% respectively. The ranges are shown in the second chart. In 2006, as shown in the table below, the actual period to period changes in the Euro Area's seasonally adjusted GDP exceeded the upper value of the range in the first, third and fourth quarters of 2006.

The Commission's forecast is based on a factor model--a largely mechanical technique that condenses a large data set of some 2000 time series for the Euro-area countries into a small number of "factors". The model uses these "factors" to make projections of euro-area GDP. The model is not equipped to take into account such one time events as the VAT increase in Germany in January 2007. As a result, the normal confidence level attached to the reported forecast ranges of 68%, which corresponds to +/- one standard deviation of past forecast errors, may fail to reflect the added uncertainty in the outlook relating to the first quarter's imposition of the German VAT increase.