Economic sentiment and business climate stagnate in miserable euro area

Family picture after the 3rd meeting of the High Level Expert Group on Key Enabling Technologies, with the participation of Antonio Tajani, Vice-President of the European Commission, and Johannes Hahn, Member of the European Commission. (EC Audiovisual services, 29/01/2014).

Tantalizingly slow proves the tempo of Eurozone’s economic resumption, if such a thing exists at all. According to the European Commission Directorate General for Economic and Financial Affairs (ECFIN), “in January the Economic Sentiment Indicator (ESI) increased by 0.5 points in the euro area (to 100.91) and by 0.9 points in the EU (to 104.7)”. However, the problem is that this indicator keeps rising since last May, without any visible positive effect on employment and GDP growth. What is even more disconcerting relates to the Commission’s admission that “the magnitude and sectoral scope of the improvement in confidence has moderated somewhat”.

While any indication from Eurostat, the EU’s statistical service, about the evolution of the GDP during the fourth quarter of 2013 is still pending, the confirmation that growth receded to 0.1% in the third quarter from 0.3% in the second, is still haunting the development analysis. Those results refer to quarter to quarter statistics. When passing to yearly comparisons the picture becomes more discouraging. Compared to the same quarter of the previous year, seasonally adjusted GDP fell by 0.4% in the euro area after falling by 0.6% in the previous quarter.

Only services

In detail, “In the euro area, the ESI’s increase was driven by improved confidence in services, retail trade and among consumers. By contrast, confidence weakened in industry and construction. Economic sentiment improved in two out of the five largest euro area economies, i.e. Germany (+0.7) and France (+1.1), remained broadly stable in Spain and Italy and deteriorated in the Netherlands (-1.0)”. It is obvious that economic sentiment improvement is geared by betterment in the non-manufacturing part of the economy. This observation confirms that industry keeps losing grounds.

Unfortunately, the retreat of Eurozone’s manufacturing sector is an old story. In view of that, the European Commission on 22 January presented an initiative for a “European Industrial Renaissance”. The aim is obviously to support the manufacturing, which is considered as the heart of every developed economy. Of course, the results of such an action are not expected to have an immediate positive effect on industry. It becomes apparent that over the next few months manufacturing is not expected to contribute positively to overall economic growth in Eurozone.

Industrial retreat

This is confirmed by the Press release issued today by the Commission on economic sentiment results which admits that “Industry confidence registered a small decrease (-0.5), resulting from managers’ worsened assessment of the stocks of finished products. Their production expectations and assessment of the current level of overall order books were virtually unchanged”.

Let’s see then where from any GDP growth could materialise. The same Press release states that, “The strong increase in services confidence (+1.9) resulted from improved assessments of demand expectations and the past business situation… Consumer confidence improved markedly (+1.8) and is above its long term-average for the first time since July 2011…Albeit to a lesser degree, also consumers’ views on the future financial situation of their households improved… Retail trade confidence increased markedly (+1.6)… Meanwhile, confidence in the construction sector decreased strongly (‑3.7) … Financial services confidence (not included in the ESI) increased by 4.1 points…”

In short, industry and construction, the two powerhouses of every economy, keep receding while any positive developments are expected from services and retail sales. There is nothing wrong with betterment in services, retail trade and consumer confidence. However this is not quite the kind of economic growth expected from a highly sophisticated and advanced economy like Eurozone.

Negative signs in climate

Regrettably, more negative news keeps coming from the business climate indicator. Again the Commission observes that “In January 2014 the Business Climate Indicator (BCI) for the euro area remained virtually unchanged at +0.19”. There is more in it though. The next sentence of the announcement states that “The level of the stocks of finished products was assessed more negatively”.

In short there is nothing alarmingly negative, but also no positive prospects could be detected in today’s announcement by the Commission’s Directorate General for Economic and Financial Affairs. Economic sentiment and business climate in Eurozone keep stagnating as it does the entire euro area miserable club.