Eurozone economic sentiment shows resilience - ING

Peter Vanden Houte, Chief Economist at ING, notes that a sharp increase in industrial confidence pushes the Eurozone economic sentiment index higher in September, while inflation expectations are coming off lows.

Key Quotes

“The European Commission’s economic sentiment indicator (ESI) for the Eurozone unexpectedly rose to 104.9 in September from 103.5 in August. The consensus had banked on a stabilization. Except for services confidence (remaining stable), there was sentiment improvement in all sectors. Industry confidence showed a 2.6 point increase, while retail trade saw a 1.6 point increase, now significantly above its long term average. Sentiment in the construction sector rose (+0.8), while consumer confidence slightly recovered after the drop in August (+0.3).

The country breakdown, meanwhile, revealed increases in the five largest Eurozone economies, with the Netherlands (+1.7) and Germany (1.6) putting in healthy improvements. Greece saw sentiment worsening again (-1.1), while Belgium disappointed (-1.4) on the back of a sharp decline in consumer confidence, caused by the closure of an important industrial company.

The fact that there was a strong increase in order books in industry and for the first time in 3 months also a rise in production expectations, shows that after the summer lull, the industrial sector is speeding up again. That said, the outlook for services appears to be more cautious, suggesting that it is certainly too soon to expect an overall acceleration in GDP growth.

Selling price expectations increased across the board (except for retail trade), with consumer inflation expectations rising again, after the decline in July and August. This suggests that inflation is bottoming out, although we don’t expect a significant increase any time soon. According to our Phillips curve model, we might have to await 2019 or 2020 before seeing the ECB hit its inflation target of close to but below 2%.

Today’s figures show that the Eurozone economy has shrugged off the Brexit vote induced confidence blow, though we are still far away from a significant GDP acceleration. Meanwhile, inflation, albeit rising, remains too low. The ECB will feel no urgency to act on the back of the current data and apart from small tweaks in the QE program, we expect no imminent changes in monetary policy.”