Eurozone: Economic sentiment heads south - ING

In view of Bert Colijn, Senior Economist at ING, Europhoria took a little break in May as the Economic Sentiment Indicator dropped from 109.7 to 109.2.

Key Quotes

“Still, with sentiment near decade highs and inflation weakening, the Eurozone economy is still in a strong place at the moment with GDP growth set to remain strong in 2Q.”

“Economic sentiment weakened mostly due to the service sector. Past demand and production were assessed more negatively and expectations for future demand also declined somewhat. Industrial confidence improved slightly in May, as production expectations are improving significantly. The PMI survey indicated earlier that backlogs of work are significant and as orders continue to improve, it seems likely that industrial production is set for accelerating growth in the coming months.”

“Merkel mentioned yesterday that Europe can no longer fully count on others. While she meant this politically, economically this has been the case for a while already as growth has recently been mostly domestically driven. The strength in the labour market has been important in that sense and job growth has likely continued to be strong in May given the improvements in employment in both services and industry. The weakening expectations in the service sector and the declining employment expectations do show that there might be some weakness ahead over the summer, although improving industrial output could make up for weaker growth in the service sector.”

“Price pressures seem to be dropping again at the moment. The lower oil price and stronger euro are contributing to a weakening in inflation and businesses are also indicating that their selling price expectations are not rising further. Both in industry and services May’s reading is the weakest in 2017 to date. This month’s Eurozone inflation rate is set to drop substantially, as local estimates indicate. With Spanish inflation dropping to 2% and German state inflation rates falling too, we expect Eurozone headline inflation to come in at 1.5% today, with core dropping to 1%. April’s reading was elevated because of a late Easter, May’s inflation rate will more accurately reflect current price pressures. So although Eurozone growth is strong, inflation still disappoints. This implies that no more than a change in tone of communication is to be expected from the ECB next week.”