Eurozone sentiment indicator reveals easing inflationary pressures in June

Bert Colijn ING Economic and Financial Analysis

Economic sentiment improved in June but remains well below pre-Middle East war levels, and employment expectations have weakened. With inflation pressures subsiding, the question of whether the ECB needs to continue to hike becomes more pressing.

Europe’s worries have promptly shifted from fuel shortages to blistering heat. While also not great for the economy, it is surely preferable to another energy shock. And sentiment among businesses and consumers is cautiously improving. The increase in the Economic Sentiment Indicator from 93.7 to 95 marks the second cautious increase in a row, with most of the sampling done before the US-Iran deal was reached. If the deal holds, we can expect further improvements.

When looking at the survey results for output in June, it disappoints for both industry and services. The eurozone is clearly rounding out a poor quarter with stagnation a real possibility. But expectations for the months ahead are on the rise. Concerningly, though, the employment outlook is weakening, which could prove to be a continued drag on the service sector.

Most crucially in this time of revived inflation worries, expectations for selling prices of both industry and services fell fast in June. This indicates that pressures on core inflation were already easing ahead of the deal and the subsequent sharp decline in oil prices.

For the ECB, the question is how much faith it has in the fragile US-Iran deal. Because at face value, the time to hike already seems to have passed. Oil prices have rapidly come down, the economy remains slow and while businesses are still going to pass through higher costs to consumers, the pace with which they plan to do so already seems to be fading.

But if the deal doesn’t hold and problems resurface, inflationary pressures could swiftly return. Some more time to see how this plays out before the next move on rates is therefore not a bad thing. July may be a great time to pause for the ECB, like it is for the rest of Europe.

Read the original analysis here

Author

Bert Colijn

ING Economic and Financial Analysis

Bert Colijn is a Senior Eurozone Economist at ING. He joined the firm in July 2015 and covers the global economy with a specific focus on the Eurozone.

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