Confidence Up In May

Sentiment increased in May, according to the European Commission survey results released today. The Economic Sentiment Indicator (ESI), came in at 89.4, up by almost one point with respect to April. Yet, the level remains extremely low, suggesting that GDP might fall again (or stabilise at best) in Q2.

Sentiment increased in May, according to the European Commission survey results released today. The Economic Sentiment Indicator (ESI) came in at 89.4 in May, up by almost one point with respect to the previous month. Among the largest economies of the area, confidence was up in France, Germany and Italy, while it stabilised in Spain. Germany continues to outperform its peers; the German ESI is 10 points above the other countries’ readings.

With the exception of construction, confidence improved in all sectors. Manufacturers were more positive regarding their order books and the level of inventories. Consequently, firms’ hiring intentions improved a little bit. Yet despite this improvement, employment is unlikely to pick-up any time soon. The index is still below its long-term average. Better prospects were also the main driving force behind the improvement in the services sector, while a slight decrease in fears of unemployment and expected improving financial conditions pushed up consumer confidence.

The survey confirms the absence of price pressures in the eurozone. Manufacturing selling price expectations kept decreasing, while consumer and services price expectations were almost stable in May, remaining, however, at extremely low levels by historical standards.

To sum up, confidence increased in May, but this improvement does not suggest a significant pick-up in activity any time soon. The average of the index in Q2 will probably be below the level reached in Q1 when GDP fell by 0.2% q/q. The low level of the ESI seems to suggest that output might contract again in Q2 or stabilize at best. Going forwards, the effect of an accommodative monetary policy and the improvement in financial conditions should progressively filter to the real economy.

BY Clemente DE LUCIA

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