June 1, 2018

News in Charts: Political Uncertainty Drags EA Economic Sentiment Down

by Fathom Consulting

Since peaking in January, Fathom’s Economic Sentiment Indicator (ESI) for the euro area as a whole fell for two straight months. It remained broadly flat in April at 1.3%, as the downward trajectory of weaker survey data across the bloc continued into the second quarter of 2018.

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Digging deeper into the country detail uncovers more of a mixed bag, as small increases in France and Spain were offset by declines in the other series, particularly in Germany.

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Weak Ifo and PMI readings drove the decline as the euro area’s largest economy continues to suffer from a loss of confidence in its economic future. The ESI for Germany fell by 0.2 percentage points in April, the largest monthly decline across the region. Geopolitical uncertainty, particularly in Iran after the US decision to back out of the nuclear deal, has taken its toll on oil prices (where Germany is a net importer) with the Brent crude variant hovering around $75 a barrel.

Moving across the bloc, Italy’s ESI declined by 0.1% in April. At the time of writing, an agreement has been reached for the two anti-establishment parties to form a government, but the policy proposals made by the parties have not been well received by markets. Ten-year government bond yields briefly rose above 3%, with the spread over German Bunds reaching the highest since October 2017. However, a portion of this move has been reversed.

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We will need to wait until May’s ESI reading for more clarity on any impact of the coalition agreement on consumer and business sentiment.

Looking ahead, we do not foresee the government in Italy surviving a full term and we anticipate new elections within two years. Policies including the adoption of a flat rate of income tax, universal basic income and a repeal of previous pension reforms are likely to make Italian government finances unsustainable going forward, with further rises in government borrowing costs ultimately forcing the government to back down.

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