Eurozone: Economic sentiment-business climate to collapse without support from exports

Angela Merkel, the German Federal Chancellor and José Manuel Barroso, President of the EC, went to Paris where together with François Hollande, President of the French Republic they took part in a discussion on European competitiveness with Members of the European Roundtable of Industrialists (ERT). This discussion followed the previous debate in Berlin on the same subject which was held on 18/03/2013. (EC Audiovisual Services 19/02/2014).

According to the Directorate General for Economic and Financial Affairs (DG ECFIN), of the European Commission, in February, the “Economic Sentiment Indicator (ESI) remained broadly unchanged, marking a marginal increase of 0.2 points in both the euro area (to 101.2) and the EU (to 105.0)”. This was the outcome of increases of the relevant indices in the three largest sectors of the economy, namely industry, services and retail trade and an unexpected fall of confidence of consumers.

It must be noted that in the Eurozone the improvement of confidence in industry is the indirect outcome of a “marked improvement in the current level of export order books, which are not included in the confidence indicator.” Still this improvement has supported the manager’s assessment of the overall order books and in this way it pushed their confidence upwards a bit.

Seemingly, for the same reason, that is the betterment in the export order book, the “Business Climate Indicator increased slightly in February 2014 by 0.12 points to +0.37”. The same source found that the “Managers’ appraisal of the past production, the stocks of finished products as well as the current level of overall order books and export order books marked an improvement”.

Combining developments

Combining the two findings, it becomes evident that the internal state of the economy doesn’t help the industrial sector much. If it wasn’t the small increases in the export order book, both the Business Climate Indicator and the Economic Sentiment would have fallen in February, following the deterioration in consumer confidence. Among member states the more important developments took place in Italy and France. In the former country the ESI marked an unexpected improvement by 2.4% while in France the opposite is true with a fall of 1.4%.

In detail the industrial confidence indicator has crossed its long-term average line going upward during the last quarter of 2013. However during the last month of the past year and in the first two months of 2013 the confidence indicator stopped gaining ground and levelled out. The long-term average line of confidence is still in the negative region around the -2.5% though. At this point it must be mentioned that those percentages are the positive or negative balance of the answers given by the managers.

Salvation in exports

As stated above if it wasn’t for the slight increase in the export order book, both the ESI and the Business Climate Indicator in the Eurozone would have dived. This reality, combined with the fall of confidence amongst consumers, constitute a discouraging outlook for the internal economy o euro area.

Last Wednesday the European Sting presented the ‘Winter 2014 economic forecasts’ published by the Commission. Despite the efforts of the responsible Commissioner Ollie Rehn, to paint a better picture with the grey colors he received from Eurostat, at the end he couldn’t avoid to acknowledge the reality. He said “the outlook is for a modest rise in employment from this year onwards and a decline in the unemployment rate towards 11.7% in the euro area by 2015, with cross-country differences remaining very large”. With unemployment currently at 12%, a three decimal points reduction of the percentage of people without a job in 2015 is not at all an encouraging prediction by the Commission.

The industrial SMEs

Given that most new jobs are created in the industrial SMEs, the Commission and the national governments should become more active in what has been traditionally called ‘industrial policy’. Supporting this productive and export oriented sector can change the bleak picture and the equally grey prospects in the labour market. Unemployment at 11.7%, “with cross-country differences remaining very large” during the next two years, is not the best future to promise to Eurozone citizens.