Euro Zone: In search of confidence

EcoFlash

Confidence kept on deteriorating in September, according to the European Commission’s survey results released this morning. The Economic Sentiment Indicator came in at 85 from 86.1 in August, down for the sixth consecutive month. After falling in Q2, GDP might contract again in Q3.

Confidence kept on deteriorating in September, according to the European Business and Consumer Survey results released this morning by the European Commission. The Economic Sentiment Indicator (ESI), a good leading indicator of GDP growth, came in at 85 from 86.1 in August, down for the sixth consecutive month. The ESI has plunged to its lowest level in more than 3 years and it clearly points to a GDP fall in Q3 after that it contracted by 0.2% q/q in the previous quarter. Between Q3 and Q2, the ESI lost around 4 points.

Excluding construction, sentiment deteriorated in all sectors. The index for the industrial sector (accounting for 40% of the ESI, the highest weight) decreased by 0.7 point. Against a backdrop of extremely weak domestic demand, orders continued to decrease. Manufacturers kept adjusting production and employment to lower levels of demand. Rising fears of unemployment weighed on consumer confidence, which lost more than 1 point over the month. Consequently, household willingness to buy durable goods decreased further.

With confidence deteriorating and panellists expecting lower levels of activity, price pressures remained moderate. Firms in the manufacturing sectors have to offer significant discounts to stimulate demand. The rise in commodity prices over the summer will thus cut margins.

All in all, today’s data confirm that short-term prospects for the zone are mediocre. The eurozone desperately needs to restore confidence and to escape from recession. The ECB played its role, announcing at the beginning of this month its new plan to buy, under conditionality, debt securities on the secondary market without time limits or quantity restrictions. The eurozone is now armed with a complete, efficient stabilisation mechanism to cope with contagion risks. However, the positive effects that the ECB announcement had on financial markets are currently dissipating. As it is often been the case, there was a kind of complacency among EU leaders following easing in tensions. Conditions are particularly tense in Spain, which could (and probably will) ask for international helps soon, paving the way for an ECB intervention in the secondary market.

Published On Thu, Sep 27 2012, 10:58 GMT Previous entries

Clemente De Lucia

Follow Follow my activity on FXstreet.com BNP Paribas website

Expert in Euro Zone, Italy and Euro Zone Labour Market.

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