Economic sentiment in the European Union (EU) has hit its highest level for a decade. The latest Economic Sentiment Index (ESI) figures released by the European Commission (EC) this morning show that the figure increased by 1.1 points in both the euro area and the EU.
This takes it to levels last seen in the summer of 2007 (113.0 points in both regions). Eurozone sentiment firmed on the back of higher industry, retail trade and construction confidence. Sentiment in services and among consumers, by contrast, remained virtually unchanged.
The ESI rose in all of the largest euro-area economies, most so in the Netherlands (+1.9) and Italy (+1.8), followed by Spain (+0.6), Germany (+0.5) and France (+0.4).
Industry confidence rallies
Industry confidence (+1.6) continued the rally it started last autumn, adds the EC. This is thanks to managers' higher production expectations and improved appraisals of the current level of overall order books, it explains. Assessments of the stocks of finished products, however, remained flat.
Financial services confidence (a measure not included in the ESI) slipped (-6.8). This was due to markedly worsened assessments of the past business situation and past demand. These were only weakly counteracted by somewhat improved demand expectations, says the EC.
Employment plans remained broadly unchanged in industry, services and retail trade. They were revised upwards in construction. Selling price expectations firmed across all surveyed sectors, in line with higher price expectations among consumers.
The eurozone economy is looking stronger than it has in a long time, comments Bert Colijn of ING. As [ECB president Mario] Draghi is about to announce his plans for QE (quantitative easing) in 2018, the economy is far from an argument to keep QE going at the current pace, he says.
“Consumer confidence even reached its highest level since 2001 this month,” he adds.
For Colijn, the main issue remains inflation itself. Pipeline inflation pressures are building as wage growth ticked up in the second quarter, he observes. The job market recovery is slowly but surely working its way through to wage pressures.
This means that the eurozone Phillips curve (which measures the inverse relationship between unemployment and inflation in an economy) is not to be buried just yet, he cautions.
Hiring expectations pick up cautiously
Hiring expectations picked up cautiously, indicating that the solid job market recovery is likely to continue at a solid pace at least until the end of the year, he continues. “Most importantly, selling price expectations surged in both manufacturing and services, beating the high readings of earlier this year.”
This indicates that improvements in core inflation could be sooner than expected, he observes. That should leave the ECB confident to taper. However, current ECB staff projections for inflation in 2019 are still well below target, which means that tapering does not yet mean tightening.
“With surveys this buoyant, that is a difficult message for the ECB to convey,” he says.
Business climate indicator also up
The Business Climate Indicator (BCI) for the euro area also increased in September (+0.26 points to +1.34).
Managers' production expectations, views on overall order books and, in particular, their appraisals of export order books, as well as past production improved, says the EC. By contrast, the assessments of the stocks of finished products remained unchanged.