Macro Monday 39 - Euro Area Economic Sentiment Indicator (ESI)Macro Monday 39
Euro Area Economic Sentiment Indicator
(Next Release is this Wednesday 27th March 2024)
Last week we covered the the Euro Area ZEW Economic Sentiment Index (the "ZEW Index") and learned that the sentiment data for the ZEW Index comes from 350 economists spanning the Euro Area (20 of the 27 EU member states that use the Euro currency). The ZEW Index attempts to provide a sentiment lead with economists factoring in their 6 month forward projections into the sentiment data.
This week we look at a different more current sentiment indicator, the Euro Area Economic Sentiment Indicator (ESI). The data for the ESI is derived from the businesses and consumers of all 27 EU Member States. The ESI therefore has a larger data set to the 20 countries covered in the ZEW Index. The ESI is closer to the truth of what businesses and consumers are currently experiencing on the ground across Europe. The ESI is not forward looking like the ZEW index, the ESI should be considered a coincident indicator presenting the current state of economic sentiment among businesses and consumers across the EU. In any event we can still use the ESI data and the chart to identify trends and to know where sentiment stands when it is released each month.
Interestingly, at present the ESI figure is more negative than the ZEW Index. The ZEW is in positive sentiment territory (forward looking) whilst the ESI is firmly in negative sentiment territory (current outlook). Based on each data sets objective, you would think that the ESI would move into positive territory over the coming 6 months based on the forward looking positive ZEW Index. No guarantees of course. We can watch this as it plays out in real time and see if the ESI follows the ZEW Index.
Lets have a closer look at the ESI
The Euro Area Economic Sentiment Indicator (ESI) is a measure created by the European Commission to gauge economic confidence across the Euro Area.
The survey data for the Economic Sentiment Indicator (ESI) is initially collected at the national level for each country within the Euro Area. These individual country results are then aggregated to create the overall ESI, which reflects the economic sentiment for the entire EU (all 27 countries). The data is also seasonally adjusted to account for regular seasonal variations and provide a clearer picture of the underlying economic trends.
The data is derived from survey responses from the following economic sectors in each country (with weightings);
1. Industry (40%)
2. Services (30%)
3. Consumers (20%)
4. Retail (5%)
5. Construction (5%)
Balances are constructed as the difference between the percentages of respondents giving positive and negative replies.
The ESI data is scaled to a long-term average of 100 with a standard deviation of 10. This means that the average sentiment over time is set at 100.
As the ESI’s scale centers around a mean of 100 values above this suggest higher-than-average confidence, while those below indicate lower confidence. It’s seasonally adjusted to reflect consistent economic trends.
The Chart (above subject chart)
The chart follows the structure discussed above and we have split the chart by color as follows:
>100 = Above Average Economic Sentiment🟢Green
<100 = Above Average Economic Sentiment🔴 Red
▫️ As you can see on the chart we made a record low in pessimism in May 2020 at 58.7 which was closely followed by a record high in optimism in Oct 2021 at 119.5.
▫️ The chart has arrows that are 17pts in length. You will see the arrows across the chart whereby if there was a greater than 17pt drop from the green zone into red the red zone, this historically has coincided with recession
▫️ The most recent drop from🟢119.5 in Oct 2021 to 🔴93.9 in Oct 2023 is a drop of 25.6pts, greater than the 17pt typical recession drop. "This time might be different" may actually apply because we had all time highs in sentiment in Oct 2021, however that does not detract from the fact we are currently firmly in negative economic sentiment sub 100 at 95.4.
▫️ You can see that any time we have fallen below the 85 level (red dotted line) we have confirmed a recession. This does not mean that you need a sub 84 reading for a recession, only that when this has occurred in the past, it only occurred during some of the deeper recessions.
A quick note on the Euro Area terminology as this was bugging me as the ESI covers all 27 EU member states
Euro Area Terminology?
The term “Euro Area Economic Sentiment Indicator” can be somewhat misleading because the ESI indeed covers all 27 EU Member States, not just those in the 20 in the Euro Area or Eurozone. The name likely persists because the ESI is particularly significant for the Euro Area, where economic policies are closely aligned and the shared currency means that economic sentiment has direct implications for monetary policy. However, the ESI’s broader EU-wide scope allows for a comprehensive view of economic sentiment across the entire European Union, which is valuable for comparative analysis and policy-making at the EU level.
Thank for coming along again, if you like the content and find it informative please let me know
PUKA
