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The Euro Area has a growth problem, Accessible Data
Figure 1. Potential Output Growth and the Output Gap
The figure contains two charts organized in a single row. In both charts, the x-axis measures time and ranges from 2001 to 2023.
Left chart: This is a line chart with four lines. The black solid line is our estimate of the year-over-year growth rate of potential output, the red dashed line is the European Commission estimate, and the blue dashed-dotted line is the International Monetary Fund estimate. The gray dashed line is the year-over-year growth rate of real GDP. The y-axis measures percentage points and ranges from -6% to +5%.
The point of this chart is to compare the solid black line with the red dashed and the blue dashed-dotted lines. These three lines mostly comove. However, the black line fluctuates more during downturns, indicating that according to our model, recessions impact potential output, while the European Commission and the International Monetary Fund estimate that they have little to none.
Right chart: This is a line chart with three lines. The black solid line is our estimate of the level of the output gap—that is, percentage points deviation from potential output—the red dashed line is the European Commission estimate, and the blue dashed-dotted line is the International Monetary Fund estimate. The y-axis measures percentage points and ranges from -7% to +7%. The black line hovers around zero up to 2005, when it increases up to about 3.5% in 2007 and then falls to a little lower than -3% by 2009 in correspondence with the Global Financial Crisis.
The black line then increases again, reaching almost 0 by 2011, but then, due to the Sovereign Debt Crisis, it falls again to about -3%, reaching a trough in 2013. Since then, it increases to a little over 2% up to the Covid pandemic when it crashes to -4%. After the Covid pandemic, the black line increases rapidly, reaching 4% by early 2022, when it essentially stalled.
The point of this chart is to compare the solid black line with the red dashed and the blue dashed-dotted lines. The red and blue lines are in sync with the black line up to 2013. From 2013 to the Covid pandemic, the blue and red lines lie between one to two percentage points below. After the Covid pandemic, this wedge increases to almost four percentage points.
Notes: In the left chart, the black solid line is our estimate of year-on-year potential output growth, while the blue dashed-dotted line and the red dashed line are the European Commission and the IMF estimates, respectively. The dashed-dotted black line is GDP—we truncated the y-axis in the right chart for readability. The IMF estimate of YoY potential output growth is the result of our own calculation. Indeed, the IMF publishes only an estimate of the output gap from which we backed out potential output. Thus, the blue dashed-dotted line in the right chart does not account for any adjustment for Covid that the IMF might have done. In both charts, shaded areas indicate Euro Area recessions.
Source: Authors’ calculations, European Commission, and International Monetary Fund.
Figure 2. Output Gap Excluding Households Liabilities
This is a line chart with three lines. The black solid line is our benchmark estimate of the level of the output gap—that is, percentage points deviation from potential output—and the blue dashed-dotted (red dashed) line is the estimate obtained with our model when we exclude all assets (liabilities) of households. The x-axis measures time and ranges from 2001 (2002) to 2023. The y-axis measures percentage points and ranges from -7% to +7%.
The point of this chart is to compare the solid black line with the red dashed and the blue dashed-dotted lines. The blue dashed-dotted line and the black solid line move together, while the red dashed line is different from the black solid line. This result indicates that household liabilities matter for estimating the output gap, while household assets do not.
Notes: The black solid line is our estimate of the output gap in levels, the red dashed line is the estimate obtained omitting household liabilities, and the blue dashed-dotted line is the estimate obtained omitting household assets. Shaded areas indicate Euro Area recessions.
Source: Authors’ calculations.
Figure 3. Scenario Dynamic Effects
The figure contains two charts organized in two columns. In all, the x-axis measures quarters and ranges from 0 (the quarter at which the scenario starts) to 35 (the quarter at which the scenario ends). The y-axis measures percentage points and ranges from -3% to +3%.
Lower-left chart: This is a line chart with one black line representing the scenario dynamic effect on the log level of GDP. The black line slowly increases, reaching a peak of 3% in quarter 12. Then, the black line declines from quarter 12 to quarter 32, reaching a trough at -3%. In the last three quarters, the black line tilts slightly upward.
Lower-right chart: This is a line chart with two lines. The red dashed (blue solid) line represents the scenario dynamic effect on the log level of potential output (output gap).
- The output gap (solid blue line) slowly increases reaching a pick of 2% in quarter 10. From quarter 10 to quarter 30 the solid blue line declines reaching a trough at -3%. In the last six quarters the solid blue line tilts upward ending a little below -2%.
- Potential output (dashed red line) is flat for the first three quarters and then very slowly increases, reaching a less than 2% peak in quarter 18. From quarter 18 onwards the dashed red line declines ending a little above -1%.
Source: Authors’ calculations.