The message of the private sector business surveys computed by the European Commission was downbeat for August. Industrial sector confidence on average fell, led by a sizeable drop in Germany. The breakdown of the index reveals that the situation is fairly mixed, with some mild recovery in expected orders but overall not sufficient from reversing the downward trend started this year. What was new this month instead was a generalised drop in consumer confidence, visible both in the euro area and in central Europe. This in our view is symptomatic of the fact that although the unemployment rate is falling pretty much everywhere, households have been signalling rising inflation for several quarters and a rising appetite for savings buffer. The latest turndown in confidence overall in our view suggests that they expect their purchasing power to fall going forward, notwithstanding the strong labour market. In our view, financial markets have not yet adjusted to the idea that although measured inflation is low and the labour market is strong, consumer demand growth is on a weakening path going forward, pretty much everywhere in Europe bar a few exceptions.
The data is so far unfolding in line with our view of a deceleration of GDP growth everywhere next year, coupled with continuing rising inflation and modest monetary tightening in most countries in 2019. However, we note that the increasingly aggressive stance of the US on trade and sanctions have raised the risk of entering recession within 18 months.