This week the Italian Finance Minister declared that, in spite of the fact that his country reported negative economic growth for the eighth successive quarter, the country is moving out of the recession.
We also had positive news from the UK where economic growth in the second quarter of this year was better than expected.
The media reported that most of the other EU member states are expecting an improvement in their economic performance.
One pertinent question is to whether this improvement in economic performance is based on something ephemeral as perceptions or hard economic data.
In July, the level of the ESI in Malta was the highest in the whole of the EU at 106.3. It has been rising progressively since September of last year
Economies are equally capable of talking themselves into and out of a recession. They are also capable of creating bubbles that lead to short-term economic gains; and Europe and the world in general have had their fair shares of economic bubbles in the last 15 years or so. Therefore economic sentiment is a very crucial indicator to look at.
The Italian Finance Minister believes that his country’s economy is moving out of the recession, not because the data is saying so, but because he has perceived an improvement in economic sentiment, which would eventually lead to an improvement in economic performance.
That something positive is in the air became evident from the Economic Sentiment Indicator published by the European Commission. The Economic Sentiment Indicator (ESI) is a composite indicator made up of five sectoral confidence indicators with different weights.
The five sectors are the industrial confidence indicator, the services confidence indicator, the consumer confidence indicator, the construction confidence indicator and the retail trade confidence indicator. The ESI takes the form of an index with mean value of 100. The data is obtained through surveys that are conducted in each member state of the EU.
In July, the Economic Sentiment Indicator (ESI) increased by 1.2 points in the eurozone (to 92.5) and by 2.4 points in the whole of the EU (to 95.0), continuing the upward trend that has been observed since May.
In the eurozone, the ESI’s increase was driven by improved confidence among consumers and managers in industry, services and retail trade. It weakened only in the construction sector. Economic sentiment improved in the four larger eurozone economies, namely Spain, Italy, France and Germany. The improvement in sentiment in the UK, the largest EU economy outside the eurozone, was even more marked.
It is interesting to note what caused the improvement in economic sentiment. A great deal of this improvement can be attributed to better expectations. In the industrial sector business leaders claimed to have better production expectations, while consumers expect an improvement in the employment situation. The retail sector expressed an improved assessment of business expectations.
Whether this improvement in economic sentiment, as a result of improved expectations, will generate economic growth, create new employment opportunities and get the EU economy out of the recession remains to be seen.
A positive sentiment tends to create a feel-good factor that encourages consumers to spend more and investors to risk more.
This is where its importance lies. On the other hand, economic sentiment alone cannot generate progress. The banking sector needs to provide support through better access to finance, while the public sector needs to support this sentiment through structural reforms and by not increasing taxation. Otherwise, economic sentiment remains something ephemeral as all sentiments are.
One may ask where Malta stands in relation to this indicator.
In July, the level of the ESI in Malta was the highest in the whole of the EU at 106.3.
It has been rising progressively since September of last year. So giving a political dimension to economic sentiment would reduce its importance, as essentially, economic sentiment is an expression of how consumers and business view the economic situation.