News Sentiment indicator disregards Covid

The economic sentiment indicator drawn up by the European Commission and included in the Central Bank’s Quarterly Review would make it seem that Covid never happened. In fact, Covid is never mentioned at all.

Business and consumer surveys

During the first quarter of 2020, the European Commission’s economic sentiment indicator fell to 93.8, from 99.7 in the preceding quarter, thus remaining below its long-term average of around 100.0.

The overall ESI indicator also remained below that in the euro area, which averaged 100.1.

Confidence weakened across most sectors, with the strongest declines being recorded in the services and construction sectors. By contrast, consumer sentiment improved.

Nonetheless, when accounting for the variation in the weights assigned to each sector in the overall index, it appears that the deterioration relative to the fourth quarter of 2019 was driven almost entirely by the services sector and industry.

Furthermore, the evolution of sentiment in industry and services largely explains why the overall ESI has fallen below its long-term average in recent quarters.

Confidence in the services sector eases but remains positive

Confidence in the services sector fell to 6.6, from 18.1 in the preceding quarter. The latest reading also stood significantly below the long-term average of 22.6. The decrease in sentiment in the first quarter of 2020 was driven by weaker assessment of demand over the previous three months and, to a lesser extent, by respondents’ demand expectations in the coming months.

At the same time, participants were less optimistic in their assessment of the business situation over the past three months.

Supplementary survey data indicate that the share of respondents anticipating an increase in prices over the following three months decreased, though it remained positive.

Confidence in construction halves

In the first quarter of 2020, confidence in the construction sector halved to 10.2, from 21.2 in the previous three-month period. Notwithstanding this decline, sentiment remained well above its long-term average of - 11.4.

Lower sentiment was driven both by a fall in order book levels and in short-term employment expectations.

Supplementary survey data indicate that labour shortages remained the main factor limiting production. However, these were slightly less pressing than they were in the fourth quarter of 2019. Furthermore, fewer respondents anticipated an increase in selling prices in the next three months.

Industrial confidence remains negative

Confidence in the industrial sector decreased to -11.9 from -7.0 in the previous three-month period, thus falling further below its long-term average of -3.3.

The recent fall in sentiment was almost entirely driven by weaker production expectations. At the same time, the number of firms reporting above normal stocks of finished goods increased marginally.

By contrast, on balance fewer participants reported falling orders.

Additional survey data show an increase in the share of firms anticipating falling selling prices.

Confidence in the retail sector declines further

Sentiment in the retail sector declined to -7.6, down from -4.5 in the fourth quarter of 2019. Thus, it fell further below its long-term average of 2.5. Weaker sentiment was driven by a significant deterioration in firms’ expectations of business activity over the next three months.

Meanwhile, participants were more upbeat in their assessment of business activity over the preceding three months. At the same time, the share of respondents that considered their stock levels to be above normal edged down.

Supplementary survey data indicate that, on balance, orders expectations stood more negative in the quarter under review. By contrast, fewer firms antici-pated falling prices in the coming quarter.

Consumer confidence improves slightly

Consumer confidence stood more positive during the quarter under review. It rose to 5.5 from 4.3 in the last quarter of 2019. Although it stood below the record high reading reported in the first quarter of 2018, it remained well above its long-run average of -11.2.

The improvement in sentiment during the quarter under review was driven by consumers’ assessment of their financial situation over the previous 12 months. Expectations about the financial situation over the next 12 months also improved, though marginally. At the same time, expectations of major purchases over the next 12 months were less negative than before.

By contrast, respondents’ outlook of the general economic situation in the 12 months ahead softened.

Supplementary survey data suggest that, on balance, a smaller net percentage of respondents expected unemployment to fall in the months ahead.

At the same time, the share of consumers expecting prices to increase over the next 12 months more than halved.

Employment Expectations cator decreases

Indi

The EEI – which is a composite indicator of employment expectations in industry, services, retail trade and construction – declined.

In the first quarter of 2020, the latter averaged 97.6, lower than the 100.3 recorded in preceding quarter and, thus, slightly below its long-term average of around 100.0.

The decrease in employment expectations in the quarter under review reflected softer employment expectations in industry and in the retail sector, and, to a lesser extent in construction.

These outweighed positive developments in services, where employment expecta-tions rose, though they still remained below their historic mean.

Overall, the EEI suggests that employment prospects were slightly weaker than their long-term average, as below average prospects in industry and services offset above-average recruitment plans in the other sectors of the economy.