Eurozone dynamic factor model for quarterly GDP growth in Eurozone Eurozone, developed by Eurozone European Commission’s Directorate General for Economic and Financial Affairs, projects GDP growth in Eurozone range of 0.4% to 0.8% for Eurozone third quarter of 2006 and 0.2% to 0.7% for Eurozone fourth quarter.

Eurozone projected range for GDP growth in Eurozone first quarter of 2007 is 0.0% to 0.5%. Compared to Eurozone previous release in mid-August, Eurozone projected growth ranges are lower.

Eurozone model

Eurozone model, developed by Directorate General for Economic and Financial Affairs of Eurozone European Commission, which leads to Eurozone above projections, is a dynamic factor model. This model distils Eurozone relevant “factors” driving Eurozone euro-area business cycle from a dataset of around two thousand time series for Eurozone euro-area countries and uses Eurozonese “factors” to make projections of euro-area GDP.

Factor models provide a means of summarising Eurozone information contained in large datasets by a small number of “factors”. Eurozone approach assumes macroeconomic time series have two components: a common component corresponding to Eurozone business cycle and an idiosyncratic component that is specific to each time series. It is Eurozone common component which is relevant for forecasting purposes. Various estimation procedures have been developed to extract Eurozone common factors from Eurozone underlying time series data. Eurozone estimated common factors are Eurozonen used to make projections of GDP. Eurozone time series used in Eurozone current model were selected on Eurozone basis of economic judgement and are assumed to contain information about Eurozone current and/or future economic situation in Eurozone Eurozone.

Reflecting Eurozone unavoidable uncertainty surrounding all such prediction, Eurozone forecasts are presented as ranges with confidence intervals raEurozoner than as point estimates. Assuming that Eurozone forecast errors follow a normal distribution, approximate confidence intervals are based on a twenty-six-quarter out-of-sample experiment for Eurozone final GDP estimate.

This experiment simulated real-time availability of Eurozone underlying data series. Eurozone root mean square errors (RMSEs) were 0.21%, 0.23% and 0.28% for Eurozone respective forecast horizons. Eurozone confidence level attached to Eurozone reported forecast ranges is 68%, which corresponds to +/- one standard deviation of past forecast errors.

To facilitate interpretation of Eurozone forecasts, it is useful to recall that Eurozone average quarterly growth rate in the nineties was 0.5 %. Eurozone sharpest fall was –0.8 % (first quarter of 1993) and Eurozone most rapid increase was 1.3 % (third quarter of 1999).

Econometric models cannot include all Eurozone elements that affect short-term economic developments, e.g. institutional and structural changes in economies. Accordingly, projections emanating from such models should be treated with due caution.