European Economic Forecasts and Trading the Euro

The European Commission (EC) published economic forecasts for European Union countries on May 5th 2014. The forecasts are produced by the Directorate-General for Economic and Financial Affairs (ECFIN).

Forex trading is strongly affected by economic growth. Reading the latest EC forecasts I was struck by how optimistic they are compared to recent private sector forecasts. In this article I look at these forecasts and how they compare to the private sector forecasts reported by The Economist.

The European Commission Economic Forecasts

The European Commission is the executive part of the European Union. The EC publishes economic forecasts three times a year. The forecasting unit states:

The forecasts extend over a time horizon of at least two years and cover about 180 variables. The forecasts are not based on a centralised econometric model, but are analyses made by DG ECFIN country desks, using models and expert knowledge. Consistency is ensured by a number of cross-country and cross-variable checks. 

The Economist Economic Forecasts

The Economist publishes regularly updated economic forecasts. These forecasts are published in their weekly magazine and include data for 59 countries. The forecasts are produced by polling a group of 20 private sector economic forecasters. The economic forecasters polled include all the major US and European banks.

A Comparison

The table below shows a selection of European countries including the largest economies and some of the eurozone periphery countries that have experienced significant economic problems since 2008.

EU – Released 6 May 2014Private Sector May 2014EU – Released 6 May 2014Private Sector May 2014
2014201420152015
UK2.70%2.90%2.50%2.60%
Germany1.80%1.80%2%1.90%
France1%0.80%1.50%1.20%
Italy0.60%0.50%1.20%1.20%
Spain1.10%0.80%2.10%1.20%
Netherlands1.20%0.90%1.40%1.40%
Ireland1.70%1.30%3%1.70%
Greece0.60%0%2.90%2.80%

The table above shows that, apart from the UK, the EC expects economic growth to be higher than the private sector forecasters do. In particular, the EC is considerably more positive about the prospects of the eurozone periphery.

Signficance and Conclusions

For forex traders this disparity between the EC figures and the private sector figures is interesting because it is saying that, either the EC is being over-optimistic about European growth prospects, or the private sector is too negative.

At the current time the ECB is the single biggest driver for the direction of the euro. Every month President Mario Draghi announces the eurozone interest rate decision and every month he is questioned by financial journalists trying to pin him down on whether he is intending to introduce further monetary easing, possibly in the form of QE. So far the ECB has held firm against the demand for more easing.

The ECB relies heavily on the EC economic forecasts and they are frequently mentioned in the ECB’s Monthly Bulletin.

If these EC European economic forecasts prove to be more accurate than the private sector forecasts this will be positive for the euro. There is a strong sentiment amongst many traders that the eurozone will be forced to ease interest rates further to combat low inflation. Stronger economic growth will tend to support prices and will encourage the ECB to avoid reducing rates for the time being.

However, if the private sector forecasts turn out to be more accurate, weak prices could continue and the ECB may underestimate the risk of deflation. This could see the bank eventually being forced into more drastic action. This action would almost certainly be negative for the euro

Future economic growth in the eurozone is still uncertain. Whether this growth is good or bad will have a major influence in the future direction of the euro. To keep informed about the latest information visit my page on European Economic Growth for Traders.

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