Fabian Demicoli

August 2014: Economic Sentiment falls in the euro area and the EU

In August the
Economic Sentiment Indicator (ESI) fell in the euro area ( by 1.5 points to
100.6) 1 and the EU ( by 1.2 points at 104.6).

Euro area developments

After a
broadly flat development over the last five months, August's decrease shifted
the euro area headline indicator back to its December 2013 level. Worsened
sentiment resulted from deterioration in retail trade, consumer, industry, and,
to a lesser extent, services confidence. Construction confidence remained
broadly unchanged. Amongst the largest euro area economies, sentiment dropped
significantly in Italy (-4.1), sending the ESI below its long-term average of
100, and in Germany (-1.9). Milder contractions were booked also in France
(-0.6) and the Netherlands (-0.8), while sentiment remained flat in Spain.
Since January 2014 construction confidence in Malta has reduce by -11. Weakened
industry confidence (-1.5) was caused by managers' more careful views on
expected production, while assessments of the current level of overall order
books and the stocks of finished products stayed broadly unchanged. By
contrast, managers' assessments of the level of past production and, to a
lesser extent, export order books, which do not enter the calculation of the
confidence indicator, improved.

confidence slid somewhat (-0.5) owing to downward revisions of managers'
assessments of the past business situation and past demand, while their demand
expectations remained virtually unchanged. The deterioration in consumer
confidence (-1.6) was driven by more negative assessments of future
unemployment and the future general economic situation, and, to a lesser
extent, future savings and households' future financial situation. Falling
retail trade confidence (-2.3) was the result of mangers' more pessimistic
views on both the present and expected business situation together with a
worsened assessment of the adequacy of the volume of stocks. Malta retail trade
has lower by -18.4 from January to the month of August. The broadly flat
development of construction confidence (-0.2) reflected downward revisions of
the level of order books partially offset by a small improvement in employment
expectations. The slight increase (+0.4) in financial services confidence (not
included in the ESI) was backed by more positive appraisals of the past
business situation and past demand, while demand expectations were revised

plans saw an upward revision in services, while they remained broadly unchanged
in industry and construction and deteriorated in the retail trade sector.
Selling price expectations increased in services and construction, but declined
in the other two surveyed business sectors (industry and retail trade).
Consumers' price expectations were revised downward.

EU developments

relatively more moderate decrease of the headline indicator in the two largest
non-euro area EU economies, the UK (-1.1) and Poland (-1.0), resulted in a less
severe contraction for the EU ESI (-1.2) compared to the euro area.

construction confidence improved, while, as in the euro area, industry, retail
trade, services and consumer confidence slipped. Financial services confidence
booked a more robust improvement (+1.9). Contrary to the euro area, EU-wide
employment plans were revised downwards in industry but increased slightly in
construction and remained flat in retail trade. EU price expectations were in
line with those for the euro area apart from a broadly flat development in

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