Eurozone: The growth outlook through the lens of survey data

Inflation in the Eurozone is declining and recent survey data point towards a possible stabilisation of economic activity. However, inflation remains well above target and business sentiment has reached a (very) low level. Based on the historical relationship, the current level of the S&P Global composite PMI and the economic sentiment index of the European Commission point towards, at best, a stagnation of activity in the coming months. Whether growth will turn out to be higher or lower will largely depend on how the environment will change. Downside risks are the delayed effect of past monetary tightening and, to a lesser degree, the recent rise in energy prices and the weaker growth environment in China. Disinflation and the start of monetary easing, which we expect in the second quarter of next year, should be growth supportive. On balance and considering the (very) low levels of survey data, one understands why in the communication of the ECB, the emphasis has shifted from raising rates to keeping rates at the current level long enough. It reflects a growing concern of hiking too much.

For analysts covering the Eurozone, the latest data have brought a little relief. The flash estimate for inflation in September showed a decline to 4.3% y/y (5.2% in August) and core inflation was also significantly lower (4.5% versus 5.3% the previous month). In both cases, inflation was lower than expected by the Bloomberg consensus forecast.[1] Besides, the flash estimate of S&P Global’s composite PMI edged slightly higher in September, from 46.7 to 47.1. Based on its latest business and consumer survey, the European Commission reported that economic sentiment was “mildly lower” in September, but the employment expectations indicator picked up slightly and remains well above its long-term average. The inflation data increase the likelihood that the ECB will no longer raise its policy rate, whereas the survey data could be interpreted as signaling a stabilization in sentiment after the significant decline that started early last year.

Relief about the change of an economic number should not make us forget that the level also matters, if not more. In this respect, the situation remains problematic. Inflation remains well above the ECB’s 2.0% target and sentiment levels are in the left tail of the historical distribution (chart 1 and 2). This is in particular the case for the composite purchasing managers’ index. The latest reading for the economic sentiment index (ESI) of the European Commission is less extreme, but still very low.

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