Worsening Conditions Deteriorated Further In April

The eurozone is blocked into recession. This is the message coming from April’s survey data. The Economic Sentiment Indicator (ESI), published by the European Commission confirmed that confidence deteriorated in April, as indicated by other European (PMIs) national surveys (IFO, INSEE). The ESI fell to 88.6, losing 1.5 points in one month. Early activity indicators for the second quarter of the year are everything but encouraging.

The German engine might have moved into reverse. The German ESI, which had been increasing since November 2012, declined by more than 2 points, falling below the long-term average of 100. Among the largest economies of the area, confidence decreased further in Italy and France, while it rose by more than 1 point in Spain.But it is not just the dynamics that are not encouraging. Indices are extremely low by historical standards, questioning the possibility of these economies to switch back to growth in the short-run.

By sector, confidence fell by 1.5 points in the industry and by 1.8 points in the services. Manufacturers were particularly upset by prospects of demand which continued to decline (the orders index was down by more than 3 points), consequently cutting back production and employment. Lower levels of demand were also the main factor driving down confidence in the services sector. By contrast, consumer confidence surprised slightly on the upside. Household’ fears of unemployment decreased in April, and their assessment of financial situation improved. Recently released hard data on unemployment are, however, challenging households’ assessment, and a downward correction is likely next month.

Survey data released so far are questioning the ECB’s view that the eurozone might switch back to growth in the second part of the year. The downside risks to growth, highlighted by President Draghi, including a weaker than expected domestic demand, are probably materializing. Against a backdrop of declining inflation (according to the survey, firms’ price expectations kept easing) and deteriorating activity, the ECB might cut rates at this week Governing Council meeting.

BY Clemente DE LUCIA

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