Following two months of our barometer falling, we have some good news. It gained three points in May, reaching +13. The boost in confidence among Luxembourg manufacturers was largely responsible for the increase, as the ZEW index has continued its freefall, reaching its lowest level since July 2016, 1.9 points.
In Luxembourg, the excellent performance of industrial production in January, up 6.8% year-on-year, was a large driver of the recovery. Additionally, inflation remained relatively low at 1.1% over one year in March. In the last edition, it was mentioned that the contraction of the financial sector had largely influenced the weak growth in 2017. This is rather unusual given that 2017 was a period of renewed confidence. Employment in the sector increased and stock markets showed strong growth, making the decline seem contradictory. However, while there was a contraction, the sector’s performance, relative to the Eurozone, in current prices was decent. Especially with Luxembourg having reached 1.9% growth of value added compared to the Eurozone’s 0.5%.
Looking at the Eurozone, despite the continued decline in economic sentiment, real economic indicators remain positive. The ECB has maintained its accommodative policy, employment continues to grow, and first quarter growth is expected to remain at 0.5%. At the same time, persistently weak inflation should continue to stimulate consumption. The main threat we see would be a sharp rise in the euro. In a tense commercial period, this could weigh on exports. Thankfully, however, this risk has not materialised. Rather, the euro has fallen and returned to end-2017 levels.