EU economic sentiment takes a summer break

Otmane El Rhazi : The European Commission released the European Business & Consumer Survey today for June. The Eurozone’s economic confidence index fell slightly against expectations of a small increase. As the Markit’s purchasing manager indices and the CESifo’s sentiment index had already been somewhat worse than the consensus forecast expected, this was not a major surprise and the real-time expectations were probably expecting figures similar to what we ended up getting.

Another reason why the market reaction was muted is that the first quarter’s economic weakness in the US, the Ukrainian crisis and the soft patch in Asia have all had a negative effect on the European outlook. However, these are seen as transitory and not permanent. Fortunately, purchasing manager indices in Asia found positive territory in June, and while the macro data from the US remains mixed, it looks as if things are turning better there, too.

I bet France will end up posting a flat gross domestic growth figure for 2014, while Spain will barely avoid a deflationary trap and will post a modest growth figure. Much will depend on how the next EU Commission decides to handle the crisis. The financial markets could fear that higher oil prices and the worsening sentiment are a sign of a turnaround. The data suggests such sell-offs should be seen as temporary, and serve as opportunities not threats.

Crisis countries’ rise lifts euro area-wide index
While the euro area-wide Economic Sentiment Index (ESI) rose, a look at country-level indices shows that both the indices of Germany and France are now lower than where they were at the beginning of the year. The Eurozone’s rising index can attribute this to the continuing improvement in the “periphery” that consists of Italy, Spain, Greece, Ireland and Portugal, bolstered by less austerity and much lower sovereign bond yields.

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