December 15, 2017

News in Charts: Euro area ESIs Shrug off Political Uncertainty

by Fathom Consulting

Fathom’s latest Economic Sentiment Indicator (ESI) for the euro area remained unchanged at 1.3% in November, suggesting that the currency bloc’s economic recovery continued into the fourth quarter. Moreover, the country-level indices continue to indicate that the cyclical upswing remains broad-based, across both the core and peripheral economies.

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The German economy has thus far maintained its rapid growth trajectory in 2017 and the ESI suggests that this continued in November, despite Chancellor Angela Merkel’s failure to agree a coalition government. Crucially, however, much of the survey data was collected prior to the collapse of the coalition talks and so may not fully reflect the impact on business sentiment.

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The Fathom ESI for France rose from 0.8% in October to 0.9% in November, predominantly driven by strength in both the manufacturing and services PMIs. The consumer confidence index also rebounded in November, increasing by two index points to 102.4. Consumer optimism peaked following President Macron’s election, but had since been in decline. Such a trend is not uncommon following the country’s national elections, and does not appear to have had an impact on consumer spending, which grew by 0.6% in the third quarter.

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Italy’s ESI continues to outperform the country’s hard economic data and is hovering around all-time highs. However, elections must be held before the end of May 2018 and have the potential to spark fresh waves of volatility, with a reversal in economic sentiment a strong possibility. Even without political uncertainty, Italy’s recovery remains fragile with numerous headwinds including the profligacy of non-performing loans threatening to destabilise economic growth.

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The ongoing constitutional crisis in Catalonia is yet to have a meaningful impact on Spain’s ESI, with the indicator unchanged in November at 1.6%. Spanish gross domestic product is now forecast to grow in excess of 3% for a third consecutive year, with the economy’s output gap closing rapidly from its estimated peak in excess of 7% just four years ago.

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The relatively muted impact of the Catalonia crisis is somewhat surprising, given the area’s importance to the national economy – the autonomous region contributes 19% of national GVA, despite only accounting for 16% of the total population. Regional elections have been scheduled for 21 December with the outcome far from certain. A strong performance by the pro-independence parties could lead to a prolonged period of uncertainty which would weigh more heavily on economic growth.

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