EMU: Confidence at a turning point?

The EU Commission economic survey for January suggests that the sentiment stopped deteriorating, maybe started to improve, but we had hoped for a more substantial improvement. Indeed, the headline economic sentiment index rose in January to 93.4, from a downward revised 92.8, earlier reported as 93.3. There was a quite pronounced geographical divergence in the euro area between Germany (106.6, +2.3 pts) and Spain (92.2, +1.8 pts) on the one hand and France (91.4, -2.1 pts) and Italy (84.3, -1.1 pts). Looking to the details, the more cyclical industrial sentiment stabilized in January for the third month at -7.2, still near the cyclical trough of -7.3 in November. So the more upbeat message out of the PMI surveys was not completely confirmed. On the contrary, the steep drop of French industrial sentiment to -16.6 from -10.3 is unsettling. The improvement of the main index was due to service sentiment that rose to -0.6 from -2.6, the first monthly increase and to consumer confidence that increased to -20.7 from -21.3, also a first increase in many months. So, while the outcome of the EU Commission sentiment survey wasn’t unequivocal, the thesis of a bottoming out of activity in the first quarter is still our main scenario.

Yesterday, all regional German CPI inflation data for January were published. Regional statistics show that the annual rate of inflation rose in Hesse, Saxony, Brandenburg and North Rine-Westfalen. CPI stayed unchanged in Baden Wuerttemberg and eased slightly in Bavaria. As a result, we believe that the EUharmonized measure will probably pick up from 2.3% Y/Y to 2.4% Y/Y in January, after falling sharply in December. On a monthly basis, inflation fell significantly in all regions (by 0.4% M/M in all regions except for Hesse, where CPI dropped by 0.3% M/M). The details show that prices of clothing and shoes, leisure and entertainment and hotels and restaurants dropped the most in the first month of the year, which is due to seasonal factors (end of the Christmas holidays and sales period). Prices of food & beverages, transportation, utilities, education and health care picked up. The pickup in the headline rates is due to last year’s sharp decline which falls out of the calculation. In the coming months however, German CPI inflation is expected to resume its downtrend and will probably fall back 2%.