European Confidence Measures Signaling Caution

Business and consumers in Europe continue to be pleasantly surprised by their current situation, but to be anxious about the future.

In Germany, the IFO research institute in Munich reported today that its sentiment indicator based on a survey of about 7,000 executives fell to 104.9 (2000=100) from 105.0 in August. It is now 1.8% below the recent peak of 106.8 in June of this year. The sentiment indicator combines the views of business regarding the present situation and those regarding expectations six months ahead. The indicator of the present situation rose 2.4% in September to 111.3 from 108.3 in August and was 15.6% above September, 2005. The expectations indicator, on the other hand, declined 2.5% in September to 98.9 from 101.4 in August and was only 2.2% above September, 2005. The divergence between the Situation and Expectations indexes since midyear is shown in the first chart.

Yesterday, the French INSEE (Institut National de Statistiques et Etudes Economique) announced that its Composite Business Climate Indicator was unchanged at 107 (2000=100) in September from August but was 1.8% below its recent peak of 109 in April of this year. Business sentiment in France has generally been higher than that in Germany as can be seen in the second chart.

Both Belgium and the Netherlands recently released their measures of business and consumer confidence. Belgium is the only country that so far has shown an increase in confidence in September. Both Belgium and the Netherlands express their measures of confidence as a percent balance. The Belgian measure increased from 3.1% to 4.5% in September, however, it is still below its recent peak of 10.1 in June, 2006. It has only been since last fall that the optimists among the Belgian and Dutch business began to exceed the pessimists as can be seen in the third chart.

Consumers in Belgium and the Netherlands have been even more pessimistic than business over the past five years. It was only in June of this year that the optimists outweighed the pessimists in the Netherlands. Pessimists continue to exceed optimists in Belgium, but the margin has narrowed to 2 percentage points in August and September. The fourth chart compares consumer confidence in Belgium and the Netherlands.

Given the improvement in the economy--above expectations--in Europe so far this year, it is not unusual that both business and consumers should express caution regarding the future. So far the confidence measures appear to be signaling just that--caution, not alarm.