Chart of the week

The European Commission’s Economic Sentiment Indicator remained sluggish and settled at 103.3 in June, its lowest level since the summer of 2016. A closer look reveals significant divergences between economic sectors. While manufacturing continues to struggle, confidence levels in the services sector and among construction companies are stable and, in the case of construction, notably high.

OUR ANALYSIS

This mixed picture is actually quite reassuring when compared with the last two recessions: in both 2008 and the end of 2011, confidence levels plunged in lockstep, unlike today. These readings confirm that the current slowdown can be explained by feeble manufacturing output due to both auto-sector disruption and trade-war concerns.

In terms of demand components, weaker manufacturing activity is reflected by changes in inventory levels. Inventories proved a significant growth drag in the last and first quarters of 2018 and 2019 respectively, and doubtless had a negative effect yet again in the second quarter of 2019. Once the external factors that are currently at play in the manufacturing sector have dissipated, conditions will be ripe for a rebound.

The opinion expressed above is dated June 28th, 2019, and liable to change.

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