Article

Good sentiment in the Eurozone, with inflation expectations increasing

The surge in public opinion

The European Commission’s economic confidence index increased to 101 points in March, up from 93.4 in February, which was slightly better than the consensus of 96. It’s the first time since the pandemic began that the reading has risen above its long-term average.

All of the larger member states saw higher sentiment numbers, with Germany seeing the largest rise in trust on record. Trust rose across the board, but the services sector stood out with a 7.7-point increase. The job expectations measure improved in manufacturing, services, building, and retail, indicating that a recovery is now well underway. This was possibly helped by increasing order books.

However, the figures may overstate the economic situation because the survey was conducted in the first half of the month before some countries reported tighter lockdown measures. But that doesn’t change the fact that, after a shaky first quarter, forward-looking measures point to a pick-up in growth in the second quarter.

Inflation expectations are gradually increasing

It’s no wonder that selling price expectations in the industry have risen to their highest level since 2011. Strong foreign demand for goods and stressed supply chains has resulted in higher prices for commodities, intermediate goods, and transportation. However, selling price expectations have risen dramatically in manufacturing, retail, and even the services sector. Price standards in services are still below their long-term average, but they are now higher in all other industries.

The pandemic’s deflationary effect is quickly dissipating, and inflation is expected to reach 2% by 2021. It’s difficult to say if this is the start of an upward trend. Any supply-chain tensions will dissipate over the course of the year, and oil prices are unlikely to rise much further. In March, consumer price expectations rose again, but are now back to their long-term average. All of this is insufficient to persuade the ECB to alter its course. The economy still requires assistance, but the prospects of the PEPP being extended beyond March 2022 are dwindling.