Eurozone very close to a sustainable growth path

Louis Galea, Member of the European Court of Auditors, second from left, gave a press conference following the publication of the ECA special report 12/2012 entitled “Did the Commission and Eurostat improve the process for producing reliable and credible European statistics?” The audit of the Court focused on the process of producing European statistics. It did not assess the reliability of specific statistical outputs. The other participants of the conference were: Jacques Sciberras, first from left, Head of cabinet of Louis Galea, Peter Schöneberger, Team Leader at the European Court of Auditors, seconf from right and Bertrand Albugues, Head of Unit at the European Court of Auditors, first from right. (EC Audiovisual Services).

After yesterday’s barrage of new positive statistics, the European economy seems to secure this summer position in the upwards pointing part of the curve. Business climate, economic sentiment and inflation all seem to turn out much better than expected readings for August. Even the abrupt fall of inflation in the euro area from 1.6% in July to an estimated 1.3% this month, can be explained without difficulty. In any case this is a Eurostat flash estimate of the August consumer price index that has to be confirmed with a new announcement on 16 September. Eurostat is the statistical service of EU and its flash estimate of inflation at the end of each month is usually correct. Let’s take one thing at a time.

Less inflation

Starting with inflation, the relevant Eurostat Press release states that “the main components of euro area inflation, food, alcohol & tobacco is expected to have the highest annual rate in August (3.3%, compared with 3.5% in July), followed by services (1.5%, compared with 1.4% in July), non-energy industrial goods (0.3%, compared with 0.4% in July), and energy (-0.4%, compared with 1.6% in July)”. A careful reading of this statement reveals that only the energy component of the August inflation index has turned negative during this month.

Given that the energy products carry a very large weight in the overall inflation, its abrupt fall to 1.3% this month can be explained by that. In short the inflation deep fall in August doesn’t hide any danger of disinflation taking hold of Eurozone. Energy prices are by and large not determined within the Eurozone but outside of it. As a result this is another positive development for Eurozone’s competitiveness.

Business climate clears

Passing now to the Business Climate Indicator (BCI), during August it increased in the euro area for the fourth successive month. According to the European Commission’s Directorate General for Economic and Financial Affairs (DG ECFIN) which conducts the survey for BCI, it rose “markedly by 0.31 points to ‑0.21. The assessment of past production, the level of overall order books and production expectations improved sharply. Also the level of export order books and the stocks of finished products were appraised more positively”. In short Eurozone’s production appears today in a much better shape than some months ago.

As for the Economic Sentiment Indicator of August it rose further in both the euro area and the EU, also for the fourth month in a row in both regions, marking a two-year high in the EU. More particularly developments in the euro area were quite optimistic. According to DG ECFIN, the strong increase of ESI in the euro area resulted from impressive improvements “in confidence among consumers and managers in industry, services and retail trade. Only in the construction sector confidence weakened. Economic sentiment improved in fourteen euro area countries and in all of its five largest economies, i.e. the Netherlands (+5.2), Germany (+3.3), Italy (+2.0), France (+1.6) and Spain (+0.8)”.

It is very interesting to note that the ESI increases in Italy, France, Netherlands and Spain is of particular importance because all those economies are considered as lagging behind. A clear improvement of the ESI will certainly translate soon in better core statistics, like GDP growth and more employment. It must be mentioned that sentiment in industry has impressively improved.

DG ECFIN notes also that “employment plans were revised upwards in industry, services and retail trade”. This means the better outlook in these major business sectors will soon be felt in the labour market, confirming the analysts who say that the time lag between the increase of GDP and the fall of unemployment will be very restricted. Already the slight increase of GDP in Eurozone and the EU during the second quarter of this year has led to an equally weak increase of employment in both the Eurozone and the EU.

All in all if those positive trends strengthen over the next few months, countering the financial crisis in half the Eurozone will be greatly facilitated.