Euro fundamentals-understanding sentiment versus growth

Someone has it wrong. Either sentiment about the euro zone’s economic future is too rosy, or projections of economic growth are too pessimistic. Monday’s Sentix index of euro zone business and investor sentiment in July <EUSTCS=ECI> was at one of the highest levels seen since the euro was launched. As the graph below shows, the index — when rebased to 100 — has moved pretty much in the same pattern as annual GDP growth over the past decade. It has tended towards, if anything, the pessimistic.

 

But forecasts for GDP growth this year suggest a levelling off, whereas Sentix would imply a significant jump. It may just be that Sentix respondents have decided they have been too pessimistic, and swung the other way. This could also explain why the Citi Economic Surprise Index was plunging in much of May and June, showing expectations not meeting reality.

 

-reuters

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Pramod Baviskar

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