Predicting Growth Cycle Regimes for European Countries

This paper examines the roles of domestic and international variables in predicting expansion and recession regimes of the growth rate cycle for Germany, France, Italy and the UK over the period 1972 to 2003, using a range of real and financial variables as leading indicators. The output gap, stock market prices and interest rates are found to be the most important variables in the domestic models. Consideration of international variables leads to prominent roles for the composite leading indicators for Europe and the US, and sometimes for US or German interest rates. Both the domestic output gap and the international composite leading indicators typically play negative roles for the probability of a growth cycle expansion, so that relatively extreme values of these may be helpful in predicting regime changes. The models for all four countries predict the post-sample recessions which start between 1999 and 2001.