EU industrial structure - EU Bookshop - Europa

The third step in assessing future developments
involves an attempt to predict future developments of
EU manufacturing production. The development of EU
manufacturing production displays significant changes
over time, with some marked breaks in the series. One
way to characterise such a series is to think of it in terms
of being in different regimes or states. Two such states can
be expansion and contraction. Provided that the economy
is in expansion, there is a probability that it will be in
contraction the next period. 24 The assessment of future
developments is performed by an econometric analysis
of the probability of contraction of EU manufacturing
production between 1990 and June 2011. 25 The three large
recessions during the time period were associated with
large probabilities of contraction. In the latest recession,
FIgURE I.14: Increasing probabilities of contraction in the end of 2011
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Chapter I — The aftermath of the crisis — a long and uneven recovery(?)
probabilities fell significantly during the end of 2009. The
probabilities of contraction remain low as manufacturing
picks up again after the trough.
The assessment also includes a forecast of manufacturing
production between July 2011 and June 2012, with the
associated probabilities for a contraction during this period
of time. The vertical blue line at the right of the figure divides
the sample into actual and predicted production. The forecast
is based on the latest available data for manufacturing
production and manufacturing new orders. 26 According to
the forecast, manufacturing production growth slows down
in the end of 2011 but picks up slowly again in the beginning
of 2012. The probabilities of contraction during the forecast
period are rising but still below 0.2, cf. Figure I.14.
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Source: own calculations using Eurostat data.
Manufacturing production
Probability of contraction
Forecast
There is a high degree of uncertainty associated with the
analysis above. The forecast of EU27 industrial production
and predicted probabilities should therefore not be taken
literally. It is very difficult to assess how the developments in
the financial markets that occur at the drafting of this report
will impact on industrial production. Also other forecasts
24 If the economy is expanding in the current time period, the
probability that the economy will be expanding also in the next
time period is p. The probability that the economy instead will be
contracting in the next period is then 1-p.
25 See Hamilton, J. D. (1989) for a discussion of the method.
and business cycle indicators indicate that economic
activity will slow down in the EU. DG ECFIN’s Economic
Sentiment Indicator declined in July 2011 both for the EU and
the Euro area. Also, the Flash Consumer Confidence Indicator
declined in July. 27
26 A bivariate VAR model including three lags of growth rates
of manufacturing production and new orders is used for the
forecast. New orders is deflated by manufacturing producer
prices.
27 http://ec.europa.eu/economy_finance/db_indicators/surveys/
index_en.htm
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