​Eurozone Recovery Keeps Going

The Eurozone economic sentiment gave another surprise increase in September despite strong headwinds with supply disruptions, labour market shortages and rising energy prices. However, it is possible that we see a bit of softening on the back of higher energy prices.

Upbeat Sentiment
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The Eurozone economic sentiment indicator increased somewhat unexpectedly in September to 117.8 from 117.6 in August. Confidence in industry picked up marginally (+0.2), while construction saw a strong improvement in sentiment (+2.0). The supply disruptions don’t seem to be slowing the expansion as the manufacturing sector expects production to pick up in the coming months.

Its not all rosy though as confidence fell back in the services sector and retail trade. Amongst the largest EU economies, the ESI rose in Spain, Germany and the Netherlands, while it declined both in France  and Italy.

Consumer confidence picked up strongly this month on the back of improved labour market expectations and strong hiring intentions also confirm this. However, increasing energy prices could have an impact on consumer sentiment in the coming months. Most of Europe’s energy is imported so higher oil and gas prices could negatively impact income effect and hurt domestic consumption.

​Inflation Higher for Longer

Selling price expectations climbed to a new historic high in manufacturing, while it is close to record highs in the other sectors. Also, consumer inflation expectations increased for the ninth month in a row. 

​​Supply disruptions and rising energy prices are causing price pressures  and these are increasingly being passed through to selling prices. Ultimately, this may keep inflation trending higher for longer.

Today’s numbers bode well for he Eurozone economy and it seems that the recovery has lots of momentum. But lets not get ahead our selves here as inflation is creeping northward as not as transitory as first thought! Third quarter growth forecast looks strong but we may start to see a slowdown from the fourth quarter onwards.

We just can’t get away from the fact that higher energy prices will hurt demand and in conjunction with supply chain issues and inflation worries, we are not out of the woods.