Recent months have seen a significant boost in European business and consumer confidence, according to the latest official statistics published by Eurostat in late July.
The data show that the Economic Sentiment Indicator (ESI), used by the EU’s statistics office to measure overall confidence in the European economy, rose to 92.5 out of 100 in the Eurozone and to 95 in the EU-28, marking a 1.2 and a 2.4-point improvement relative to the respective ESI values measured a month before.
These increases maintain the upward trend in ESI indexation observed since May this year, and have been driven primarily by “improved confidence among consumers and managers in industry, services and retail trade,” as stated in a recent European Commission press release. EU service sector confidence, in particular, has seen the largest absolute change out of all sectors covered by Eurostat’s assessment (+1.8 ESI points), followed by consumer confidence (+1.4 points) and retail trade confidence (+0.9 points).
Market observers generally attribute these changes to European businesses’ improved perceptions of the macroeconomic environment, as well as to better savings and employment expectations among the majority of working age EU citizens. More specifically, the recent improvement in business and consumer confidence reflects several developments, such as last month’s expansion of manufacturing in the Eurozone for the first time in 18 months, the gradually decelerating rate of GDP contraction in the services sector, and the small reduction in EU unemployment observed in June this year.
An additional positive development stems from the fact that the biggest overall improvements in business and consumer confidence over the past month were found in some of the crisis economies in Southern Europe, most notably Italy (a 2-point ESI increase) and Spain (1.2 points), with smaller, yet economically significant increases being observed in most of the other EU economies over the same period.
While improving market confidence across the EU may signal the beginning of the end of Europe’s economic crisis, observers should be cautious about making overly optimistic forecasts about Europe’s economic recovery. Commenting on the recently released ESI statistics, IHS Global Insight economist Howard Archer remarked that “overall Eurozone economic sentiment is still at a relatively low level compared to long-term norms, which suggests that businesses will remain cautious in their employment and investment plans in the near term at least.”
Likewise, Archer and other analysts have argued that improved consumer confidence in the EU would not necessarily lead to significant increases in private spending in the short to medium term. Furthermore, while the upsurge in business and consumer confidence in the EU could in theory help its economy recover from the crisis, one should not overlook the fact that this seeming progress is merely an aggregate projection of contrasting economic trends in 28 member states, which differ greatly in terms of economic growth, unemployment, national debt levels and other socioeconomic indicators.
Admittedly, improving business outlook in some of the crisis-hit economies such as Spain and Italy is certainly a reason for optimism. But it is important to keep in mind that other countries such as Greece, Portugal, Hungary and Latvia are still experiencing a decline in business and consumer confidence, which could potentially impede and delay those economies’ rebound from the crisis.