Eurozone economic sentiment improves, first signs of pipeline inflation - ING

Peter Vanden Houte, Chief Economist at ING, notes that the Eurozone’s Economic Sentiment Indicator rose slightly in November, still pointing at a strengthening recovery.

Key Quotes

“Deflationary pressures have now receded and pipeline inflationary pressures are starting to build, though we are still far away from the ECB’s inflation target.”

“After the PMI for the Eurozone and the IFO in Germany, the European Commission’s economic sentiment indicator (ESI) for the Eurozone increased further to 106.5 in November from 106.4 in October. However, this was slightly weaker than expected, as the consensus aimed for 107. Sentiment in industry declined after the surge in October, while services confidence stabilized. Retail trade, construction and the consumer saw a sentiment improvement.”

“Amongst the five largest Eurozone economies, the ESI rose in France (+1.5), Spain (+0.8) and the Netherlands (+0.2), while Germany (-0.7) and Italy (-0.8) experienced a fall in confidence.”

“Production expectations rose again in industry, though order books eased slightly. According to the bi-annual investment survey, real investment growth, which is estimated to have been 1% in 2016, should accelerate to 2% in 2017. A still cautious, but positive outlook. The services sector expects demand to expand faster over the next three months, a sentiment which is shared by both the retail sector and construction (stronger order books). Apart from retail trade, all sector expect employment to increase further in the coming months, a clear support for consumption. So the recovery looks unlikely to falter anytime soon.”

“Selling price expectations went up further in industry, rising to the highest level since 2012, now above the historical average. They also went up in services and retail trade, while they eased somewhat in construction. Consumer inflation expectations increased markedly. This suggests that pipeline inflationary pressures start to build, though we are still far away from the ECB’s close but below the 2% target.”

“In that regard there is no reason yet for the ECB to become less accommodative. On top of that both Mario Draghi and Vitor Constancio stated recently that the Eurozone economy still pretty much relies on monetary stimulus. In that regard we are still looking at an initial 3 to 6 months lengthening of the QE program at the current pace. Tapering will be at the earliest announced in June 2017. But the fact that inflation is now on the rise, is not something that will calm bond markets in the coming months.”