Improvement likely in EC economic indicators for July

European Commission's economic confidence indicator was 103.5 in June. Despite the softening in both the manufacturing and services flash PMIs for July released last week, it is expected to improve to 104.1 in July since the EC indicators tend to lag the PMI (and the June survey showed an improvement in both the manufacturing and service sectors). This is higher than the long-term average of 100 but lower than the historical high of around 110.

According to Societe Generale, "The economic confidence continues to be supported by QE, improving credit conditions, low oil prices and the weak euro. We think that these factors take time to feed through to the real economy, and therefore business confidence has been lagging the recovery. The improvement in economic confidence suggests that, in comparison to previous months, business leaders are more confident that the euro area is going through a sustainable recovery."

Nevertheless, the confidence level suggests they are not yet convinced that the current recovery will be as strong as previous recoveries. The improvement in consumption growth is likely to start easing going into H2, says SocGen. Regarding the net external channel, disappointing activity in emerging countries such as China suggest global trade is slowing down, which has a bigger impact on net exports than the weaker euro. Lastly, debt burdens and the uncertainty surrounding Greece (particularly within the survey period) continues to weigh on business and economic confidence. 

"The current levels of economic confidence are consistent with our view that economic recovery will be firm in Q3 and Q4 (0.4% QoQ) but slower than previous cyclical recoveries. Hence, we expect improvements in confidence to be capped in the coming months", added SocGen.