Confidence Improved In January

Sentiment continued to improve in January. The Economic Sentiment Indicator rose to 89.2, up for the third consecutive month. This trend could be confirmed going forwards. Nevertheless, do not expect a strong rebound any time soon. Peripheral countries are still lagging behind

Sentiment continued to improve in January, according to the European Commission Survey results released this morning. The Economic Sentiment Indicator (ESI) rose to 89.2, up for the third consecutive month. Since its cyclical low of 85.2 in October 2012, the index gained 4 points.

The improvement was widespread among sectors. Industrial confidence inched up (+0.3 point), thanks mainly to a better assessment of inventories of finished goods (i.e manufacturers judged them much more in line with the level of demand than few months ago) and production expectations. By contrast, demand remains rather weak as shown by declining order indices. The improvement in the services sector was more marked (+1 point) thanks mainly to better prospects for demand. Consumer confidence was also on the rise (up for the third consecutive month), reflecting better economic
prospects and diminishing fears of unemployment.

The recent improvement in financial conditions was probably the main factor driving up confidence over recent months. In addition, there are elements suggesting that this trend might be confirmed going forwards. There are signs of renewed confidence towards peripheral countries, as illustrated by new capital inflows, mirrored in smaller Target 2 deficit positions. At the latest auctions of Italian and Spanish debt securities, demand exceeded supply, and sovereign yields fell. Last week, Portugal returned to the market with the issue of a 5-year syndicated bond. Once again, demand surpassed the offer. Hopefully, better financial and funding conditions will gradually filter through to the real economy.

Yet, do not expect a sharp rebound of activity any time soon. The ESI is well below its long term average. Peripheral countries are still undertaking significant efforts to correct their imbalances, and these measures will weigh on activity. Today, the Spanish statistical office announced that output contracted by 0.7% q/q in Q4 2012. The recession probably deepened also in the other peripheral countries. The divergence within the zone will continue to characterize the dynamics of the eurozone going forwards. Hopefully, the rest of the zone will benefit from the solid rebound of Germany over the coming quarters.

Clemente DE LUCIA

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