Early signs of growth in Eurozone?

Press conference by Olli Rehn, Vice-President of the EC, on the economic forecasts for 2013-2014, (EC Audiovisual Services).

Press conference by Olli Rehn, Vice-President of the EC, on the economic forecasts for 2013-2014, (EC Audiovisual Services).

All business and consumer indicators for the euro area showed betterment in May according to the Commission’s Directorate General for Economic and Financial Affairs (DG ECFIN), which conducts those regular and harmonised surveys. Business climate indicator (BCI), consumer confidence and economic sentiment indicator (ESI) all improved during this month of May. It’s the first time since many months that all three business and consumer indicators were together on the rise. Not to forget that Eurozone’s real economy is for 18 months in a row in a recession, with its GDP on the fall. But let’s turn to details.

Those business and consumer indicators are based on regular surveys for different sectors of the economies in the European Union (EU) and in the applicant countries. They are addressed by DG ECFIN to representatives of the industry (manufacturing), the services, retail trade and construction sectors, as well as to consumers. Given that the results represent people’s sentiment about reality and of course the future, it is understandable that their answers are influenced by the wider developments. Consequently the results of those surveys may be interpreted as early indications for the things to come.

Not to forget that currently there is a growing perception in the wider public, that the financial crisis is behind us, despite the fact that the real economy doesn’t seem yet to have produced any positive signs. In such a context the people who answer the DG ECFIN questions, tend to see betterment even if today’s reality is not rosy. In any case the structure of those surveys is supposed to address effectively the possible errors in peoples’ perception. To this effect questions are designed to focus in quantifiable variables avoiding personal value judgements.

Economic sentiment

According to the findings of the survey in May the Economic Sentiment Indicator picked up again. The indicator’s recovery started in autumn last year but was interrupted by flat developments in March and deteriorations in April. May brought new increases of 0.8 points in the euro area (to 89.4) and 1.1 points in the EU (to 90.8). In the euro area, the recovery was driven by brightening sentiment in all business sectors, except for construction and, to a lesser extent, by more optimistic consumers. Four of the five largest euro area economies saw sentiment improving, namely Italy (+1.5), the Netherlands (+1.2), France (+0.9) and Germany (+0.6).

In many respects this development may seem awkward, because the real economy during the first quarter of the year produced negative developments in production and incomes. However during the past few weeks there was a growing belief that the austerity policies are coming to an end. The European Sting produced an article yesterday entitled “Mood changes in Europe in favour of growth and jobs”. This idea about a change of mood in the European Union from austerity into something more attractive is based on the European Commission’s announcement last Thursday, about giving more time to a number of countries, including France and Spain, to correct their fiscal deficits. By the same token Italy was allowed to exit the excessive deficit procedure. All those developments mean that government spending will cease to decrease and may even increase over the next months. Now let’s turn to consumers.

Consumer confidence

All 8 o’clock news during the past few months were reporting that austerity must come to an end. This has probably changed to the better the mood of the wider public. Incidentally the survey showed that consumer confidence increased slightly (+0.4) in May for the sixth consecutive month. While consumers’ expectations for the future financial situation of their households brightened and unemployment expectations declined, consumers were slightly grimmer about the future general economic situation. Their savings expectations remained unchanged. Today’s increase of consumer confidence may be transformed into tomorrow’s increased retail sales. This surely may be an early indication for the coming real economy growth.

Business climate indicator

That is probably why the Business Climate Indicator (BCI) in May for the euro area increased by 0.28 points to -0.76. While production expectations deteriorated slightly, DG ECFIN reports that “managers’ appraisal of the stocks of finished products, order books (overall and export) and past production improved. The latter component saw a particularly sharp increase”. Fortunately exports are still the strong asset of the EU economy. In the long run though sustainable growth must be fuelled mainly by internal demand for consumption and investment.

In any case the improvement of business and consumer confidence indicators is a reliable sign that real economy growth may not be far away. The question is if this return to the growth path will be strong enough to be felt in the labour market and start reducing unemployment.

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