Eurozone Economic Sentiment Improves But Consumers Wary

Economic sentiment rises further but there are concerns about unemployment risks and consumer spending looks fragile. The following is a selection of analysts' comments.

Eurozone Economic Sentiment Improves But Consumers Wary

The euro extends losses against the dollar after eurozone data showed the unemployment rate rose in June and consumer confidence deteriorated in July. The eurozone unemployment rate climbed to 7.8% in June from 7.7% in May due to the impact of coronavirus lockdown restrictions applied since March, according to Eurostat. The European Commission's consumer confidence index for the region was -15.0 in July, compared to -14.7 in June, although its economic sentiment index rose to 82.3 from 75.8. The unemployment rate and consumer confidence index were in line with consensus forecasts a WSJ poll but the economic sentiment index beat the 81.0 expected. EUR/USD falls 0.4% on the day to 1.1732, versus 1.1744 before the data.

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The further increase in the economic sentiment indicator in the eurozone signals that recovery continued at the start of 3Q, but the rebound in consumer spending could be waning, says Jessica Hinds, Europe economist at Capital Economics. In July, an improvement in business sentiment more than offset the deterioration in consumer confidence, she says, but the resurgence in virus cases poses a major risk to the outlook. "With high frequency data and consumer confidence suggesting that the revival in consumer spending is already losing pace, business sentiment and activity may soon follow suit, particularly if governments impose measures to curb the latest rise in virus cases," Hinds says.

European Commission's economic sentiment indicator rise offered encouraging news, but with the consumers still hesitant and the number of Covid-19 infections picking up, the growth pattern is uncertain, says Peter Vanden Houte, ING's chief economist in Belgium. "All sectors, except for construction and the consumer, saw a strong confidence improvement. Forward looking indicators such as order books and hiring plans in industry and services also picked up, which suggests that the recovery has legs," he says. However, fears of unemployment are marginally increasing, with the risk that a too cautious consumer slows the recovery pace, he says. "The data suggests initially a V-shaped recovery but this is likely to morph into a more patchy pattern in the coming months," Vanden Houte says.

Unemployment in the eurozone didn't rise meaningfully in June, which is helpful for the recovery of domestic demand, says Bert Colijn, senior eurozone economist at ING. The bloc's unemployment rate inched up to 7.8% in June from 7.7% in May, holding steady below 8% during a historically weak quarter, which means household incomes haven't been affected by the lockdowns as much as gross domestic product has, Colijn says. "With incomes retained, the recovery of household consumption should happen more quickly than initially expected, which also has a dampening impact on second round effects that could make the economic slump last longer," he says.

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