Economic sentiment in the Eurozone was unchanged in May at 103.8, remaining at 4-year highs. The figure is slightly ahead of a Reuter’s poll that it would come in at 103.5. Sentiment was also stable in the wider European Union, unchanged at 106.4. In a separate report, the business climate indicator for the Eurozone fell slightly in May from April but stayed positive at +0.28.
Confidence improved in services, retail trade and in the construction sector during May. Services was driven by expectations of higher demand, while construction confidence improved from positive order book levels.
Eurozone industry saw only a slight improvement in confidence and this was mainly due to rising optimism in production expectations. The biggest deterioration was in financial services but consumer confidence also suffered as consumers’ future outlook on the general economic situation, as well as on unemployment and savings, worsened. The consumer confidence indicator fell to -5.5 in May from -4.6 in April.
In the Eurozone’s largest economies, Germany and France, economic sentiment was higher in May but confidence worsened in periphery countries. Portugal, Greece, Italy and Cyprus all experienced a drop in economic sentiment compared to April. Greece had one of the biggest falls in confidence within the Eurozone since the start of the year with economic sentiment deteriorating from 99.1 in December 2014 to 91.4 in May.
There was good news on the inflation front as price expectations by businesses and consumers continued to rise in May across the Eurozone, dissipating any immediate threats of deflation. This would be welcome news for the European Central Bank (ECB) as it would be an indication that their asset purchase program, which was launched in January, is having the desired effect.
While the above indicators point to a pause in the pace of Eurozone recovery during May, the overall outlook is looking up. However, failure to resolve Greece’s standoff with its creditors could threaten to derail the recovery. Greece is fast running out of funds as it needs to pay state pensions and salaries at the end of the month, as well as meet a debt instalment to the IMF on June 5. The ECB warned today of possible contagion in financial markets if a deal is not reached soon. European officials earlier downplayed reports that an agreement is being drafted but Greece is still hoping that a deal will be reached by Sunday.
The euro started the day higher but was back in negative territory by the afternoon, dropping to 1.0884 against the dollar and down at 0.7127 against the pound.