Eurozone: Economic Sentiment surges in June, nudging the ECB to the exit - ING

Surging economic sentiment and an improving labour market allow the ECB to proceed with its baby steps towards monetary exit, according to Peter Vanden Houte, Chief Economist at ING.

Key Quotes

“The Eurozone economy continues its winning streak, making a growth figure above 2.0% no longer a fantasy. Indeed, the European Commission’s economic sentiment indicator (ESI) surged to 111.1 in June from 109.2 in May, reaching its highest level since August 2007. This was again significantly better than consensus (109.5). There was a sentiment improvement in all sectors. Industry confidence showed a 1.7 point increase, while the more domestically oriented services sector saw a 0.6 point gain. Sentiment in the construction sector surged by 2.1 points, boosted by improving order books. Finally, there was 2.4 point jump in retail sales sentiment, suggesting that consumption is on a roll. Indeed, consumer confidence also increased by 2.0 points.”

“The country breakdown, meanwhile, revealed an increase in sentiment in all of the five largest Eurozone countries, except for Italy (+0.0). In Germany it rose by 2.4 points, France (+2.2), the Netherlands (+1.6) and Spain (+0.5).”

“The current figures fit the picture painted by Mario Draghi earlier this week pretty well: the Eurozone economy is definitely gaining momentum. However, for the time being, inflation remains a less forward story. Indeed, selling price expectations softened in industry, while they increased in services and in construction. One should note that the recent trend in oil prices is likely to push headline inflation down again in the coming months. At the same time, expectations for unemployment in the consumer survey fell to the lowest level since 2007. This could increase wage bargaining power and ultimately lead to higher wages, which is according to Mario Draghi the lynchpin for monetary policy.”

“While we believe that structural forces will keep downward pressure on wage developments, it’s important to notice that the low point in the cycle might now be behind us. That will allow the ECB to proceed with an extremely cautious exit policy. We expect an announcement of the lengthening of the QE program (albeit at a slower pace) until June 2018 for the September meeting, while a first 0.2 deposit facility rate hike is likely in the fourth quarter of 2018.”