Eurozone sentiment improves in January - danke schoen Deutschland

Still no positive contagion in real economy. At first glance, today’s economic sentiment indicators add to evidence that the worst of the euro crisis might be over. The European Commission’s economic sentiment index increased for the third consecutive month and stood at 89.2 in January, its highest level since June 2012. The increase was mainly driven by improvements in consumer confidence, manufacturing and the construction sector.

The headline numbers are encouraging, a closer look at the details, however, reveals an inconvenient truth. The improvement of economic sentiment was mainly driven by Germany (+2.5 on the index). In fact, excluding Germany from the Eurozone would have yielded an unchanged confidence index. Even worse, confidence in many peripheral countries experienced a set-back and dropped in Greece (-1.1) and Portugal (-1.9). Only Spain saw a minor improvement (+ 0.5). Moreover, France also moved further away from the Eurozone’s core, seeing economic sentiment dropping by 0.3. So much for Eurozone rebalancing.

Employment expectations in the Eurozone improved somewhat in January, reaching the highest level since July 2012. Looking at the crisis-hit Eurozone countries, however, shows that the employment outlook worsened in Greece and Spain and only improved in Portugal. The social impact from record high unemployment rates combined with the weak employment outlook could become the next big challenge for the euro saviours.

Earlier today, the ECB released its latest Bank Lending Survey. The results illustrate that the Eurozone is still in the middle of a double credit whammy. Net tightening of credit standards by Eurozone banks for loans to enterprises was broadly stable in 4Q and even increased for loans to household. At the same time, loan demand is still dropping. Eurozone banks continued to report a pronounced net decline in demand for loans to enterprises in 4Q. As regards the demand for loans to households, the net decline abated in 4Q but remained a decline.

Thanks to Mario Draghi’s confidence trick, the Eurozone has recently gone through a period of calm. Financial markets are cheerful, private capital is returning to Eurozone peripheral countries and structural reforms seem to bear some fruits. This is what Mario Draghi called “positive contagion”. Today’s data, however, illustrate that this positive contagion has not (yet) reached the real economy. It is a painful reminder that stabilisation does not automatically lead to a recovery. The road towards restoring growth in the Eurozone still seems to be a long one.