Confidence improved in October. The Economic Sentiment Indicator came in better-than-expected, rising by 0.8 point to 100.7, marking the first improvement after four months of stagnation or decline. Yet, the indicator is still consistent with a very modest pace of growth We do not expect any significant improvement before the second half of next year.
Confidence improved in October according to the European Commission Business and Consumer Survey. The closely-watched Economic Sentiment Indicator (ESI) came in better-than-expected, rising by 0.8 point to 100.7. This was the first improvement after four months of decline or stagnation. Today’s results confirm the slight improvement recorded by the PMI surveys in October. Yet, there is some discrepancy at national levels. While, for instance, both the German Composite PMI and the German ESI improved in October, the IFO survey surprised on the downside. One source of divergence might be linked to the sensitivity of the different surveys to financial market turmoil. The IFO survey usually is more sensitive to sudden changes in financial markets than the other surveys.
Turning to the sectorial breakdown, the European Commission survey signals that confidence improved in all sectors. In the industrial sector (which accounts for 40% of the ESI, the largest weight) managers had a slightly more optimistic view on the economy, with rising orders and increasing production expectations. The increase of confidence in the services was also mainly driven by better demand expectations, while households had a brighter view of the general economic environment and their fears of unemployment slightly decreased. As regards to employment and price expectations, the survey shows some improvement, although not significant enough to change the current trend of subdued job creations and inflation.
To sum up, today’s data are a positive surprise. Yet we should not overreact to this reading. First of all, the ESI is still extremely low by historical standards suggesting that the pace of the recovery is still extremely weak and unable to reabsorb rapidly the large number of unemployed in the eurozone (the unemployment rate was 11.5% in September, not so far from the all-time high of 12% recorded at the end of last year). GDP growth rates in the range of 0-0.1% q/q in Q3 and Q4 of 2014 are likely. We do not expect a significant acceleration of activity before the second half of next year.
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