News in Charts: Political Uncertainty Weighing on Strong Euro Area Economic Sentiment

With the exception of Germany, Fathom’s Economic Sentiment Indicator (ESI) told a positive story of improving sentiment in the euro area in December. The aggregate indicator for the euro area ticked up slightly to 1.3%, with surveys from most countries confirming that the overall degree of economic sentiment remains elevated across the currency bloc.

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Italy’s ESI continues to outperform hard data and hovered around all-time highs at 1.4% in December. However, should the result of the March elections lead to increased financial market volatility, a reversal in economic sentiment is a strong possibility. Election polls suggest that the populist party Five Star Movement will gain the highest share of the vote, but will fall well short of a majority.  Going forward, we continue to see Italy’s fundamentals as concerning for it its long-term growth prospects.

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After several months of increases, Germany’s ESI bucked the trend in December and dropped to 1.6% as the country’s political deadlock continued. Although Angela Merkel’s CDU party, its CSU branch and the SPD successfully agreed on the results of preliminary talks last week, progressing to formal coalition talks is dependent on the SPD party members granting their approval in a vote on 21 January. To date, little evidence of a slowdown has been evident in the hard data, with the most recent reading of German industrial production data surpassing expectations. As our ESI is a timelier measure, we would not rule out a weakening in some hard economic data in Germany during the coming months.

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Finally, France’s ESI remained largely flat in December, albeit still at the highest level for a decade. Fathom’s measure of economic sentiment in France improved markedly during 2017, as the economy performed well above most expectations in the presidential election year.

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