Losing Confidence

Recent events have tempered the optimism which had been building since last autumn. The Economic Sentiment Indicator, a good track of GDP growth, lost more than 1 point in March. Survey data signal that the eurozone is still in recession, although the pace of contraction might have eased in Q1 2013.

Recent events have tempered the optimism which had been building since last autumn. Today, the European Commission published its closely watched Economic Sentiment Indicator (ESI), which, after increasing over the previous 4 months, declined by 1.1 points, to 90 in March.

Confidence declined among the largest economies of the area with the exception of Italy where the ESI surprised on the upside rising by more than 1 point. The Italian improvement was led mainly by the services sector (up by 4 points) and by a marginal increase in the industrial sector (+0.4 point) while consumers continued to lose confidence as their fears of unemployment increased and their views on the general economic outlook darkened. This rebound, however, might prove to be short-lived were political uncertainty to remain in Italy.

Among sectors, eurozone confidence declined in both industry and services. Businesses expect, indeed, lower levels of demand over the coming months. In addition manufacturers’ assessment of inventories worsened a little bit over the month, probably reflecting the deterioration of prospects for demand. Firms’ selling price expectations fell by more than 2 points, signalling that companies have to offer discounts to stimulate a weak demand.

To sum up, recent events in Italy and Cyprus reminded us that the crisis is not over. Confidence is still fragile and the eurozone still lacks growth, the key ingredient in rebuilding confidence and stimulating investors’ appetite. Today’s data, in conjunction with other survey results released earlier this month, suggest that the eurozone is still contracting, although at lower pace.

Given the slackness in the economy, ongoing disinflation, excessively tight monetary conditions in peripheral countries and renewed wave of uncertainty, the ECB might decide to cut the refi rate further going forwards. Next week Governing Council meeting will deserve a special attention.

BY Clemente DE LUCIA

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