Confidence Up In June

Sentiment kept improving in the eurozone in June. The Economic Sentiment Indicator came in at 91.3, up by 1.8 points, slightly better-than-expected. While GDP probably contracted again in the second quarter, activity might switch back to growth in the second half of the year.

Sentiment kept improving in the eurozone in June, according to the European Commission’s Business and Consumer survey. The Economic Sentiment Indicator (ESI) came in at 91.3, slightly better-than-expected.

The rise of confidence among households was the main factor behind the June’s increase of the ESI. Consumer confidence rose indeed by more than 3 points, to -18.8, driven up by declining fears of unemployment and better economic prospects. Some cautious is, however, needed in interpreting these results, as some methodological changes in the Italian data created some distortions. While the improvement in consumer confidence is welcome news, we do not expect a rapid pick-up in consumer spending in the near term.

Confidence increased in the manufacturing sector as well, although at a slower pace. Manufacturers were more optimistic thanks to better prospects for demand and by a better assessment of the level of inventories. By contrast, confidence in the services sector declined a little bit.

On a quarterly basis, the ESI averaged 89.8, which is below the average of Q1, when GDP fell by 0.2% q/q. The low levels of confidence indicators, the disruptions caused by floods in northern countries over the quarter and the slowdown of activity in some key emerging countries suggest that output might have fallen again in the second quarter. Nevertheless, the rebound of industrial output, that today’s data signal might continue, should limit the fall of GDP.

Prospects for the second half of the year are somewhat brighter; the recovery could gain some momentum, benefiting from the increase of confidence and from the improvement in financial conditions which should progressively filter through the real economy. Yet, do not expect any sharp increase in activity. Should EU leaders take significant steps to make the EMU more integrated and the ECB adopt further actions, then the recovery could be significantly boosted. Otherwise activity growth will remain lacklustre.

BY Clemente DE LUCIA

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