Economic sentiment falls but remains high from a historical perspective

In the second quarter of 2015, the decrease in confidence registered in the industrial and service sectors outweighed improvements in sentiment among consumers, retailers and the construction industry.

This was revealed in the Business and Consumer surveys carried in the latest issue of the Central Bank's Quarterly Review.

As a result of the decrease in economic sentiment, the economic sentiment indicator retreated to 114 in June, from 116 in March. Despite the drop, the ESI remains well above its long-term average of 101.

Industrial confidence weakens

Confidence in the industrial sector moved into negative territory in June for the first time in five months. The industrial confidence indicator fell to -5 from 3 in March. Following this development, by the end of the quarter it had returned to its long-term average.

All sub-components of the indicator contributed to the overall decline. Between March and June, production expectations and orderbook levels decreased. In addition, whereas in March stock levels were on balance considered to be below normal, in June respondents assessed stock levels to be slightly high, given the season.

Despite the deterioration, both the assessment of order-book levels and stocks compared favourably with their respective long-term average. On the other hand, in June production expectations fell significantly below their long-term average.

From a sectoral perspective, confidence dropped most amongst food producers, manufacturers of metal products and firms involved in printing and reproduction of recorded material. The drop in the food and printing sectors was largely due to a weaker assessment of stocks and order-book levels, whereas in the metal products sector it was mainly due to production expectations.

In contrast, confidence significantly increased and turned positive among manufacturers of furniture and other non-metallic mineral products, the latter including glass and certain types of construction material.

Additional survey data suggest that, on balance, in June, compared with March 2015, fewer respondents were expecting to expand their labour complement in the subsequent months.

Moreover, a higher proportion of respondents were expecting lower prices for their output in the months ahead.

Confidence in the construction sector increases substantially

Confidence in the construction sector improved substantially during the second quarter of 2015. In June the confidence indicator stood at 22, compared with -6 three months earlier. June's reading thus extended the general upward trend visible since mid-2014 and stood considerably above the indicator's long-term average of -28. The improvement in confidence was driven by both respondents' assessment of their order-book levels and their employment expectations for the three months ahead. Additional survey data for June also indicate that, compared with March, a greater share of respondents anticipated higher selling prices over the subsequent three months.

Sentiment in the services sector weakens

 Confidence among firms in the services sector decreased to 25 in June from 32 in March. Nevertheless, the indicator remained above its longterm average of 20. All sub-components of the services confidence indicator decreased in June when compared with three months earlier. The most significant declines were observed in respondents' assessment of demand over the preceding three months and their near-term demand expectations, whereas respondents' assessment of the business situation was broadly stable compared with March.

Nevertheless, all three sub-components remained above their long-term averages. At a sectoral level, confidence improved most among firms involved in audio-visual productions, advertising & market research, and auxiliary financial services. In all three sectors the increase in confidence was primarily driven by higher turnover during the previous three months, although demand expectations also improved.

On the other hand, confidence dropped among rental & leasing businesses, real estate agents and providers of transport services. In these sectors, the decline in sentiment was mostly attributed to a less optimistic assessment of the business situation and lower demand over the preceding three months.

Moreover, the demand expectations of firms involved in rental & leasing activities declined considerably. Additional survey data indicate that, overall, in June a smaller share of respondents intended to increase their labour complement in the following months when compared with March. Selling price expectations, however, improved.

Consumer confidence turns positive

Consumer sentiment turned positive during the second quarter of 2015. The indicator stood at 1 in June, up from -2 three months earlier. The indicator thus continued to comfortably exceed its long-term average of -23.

All sub-components of the sentiment indicator improved marginally in June when compared with March. On average, in June consumers assessed the general economic prospects and their financial situation over the subsequent 12 months more favourably than they did in March.

Additionally, on balance, a higher share of consumers planned to save over the course of the subsequent 12 months. Consumers' unemployment expectations over the subsequent 12 months remained broadly unchanged compared with three months earlier. All sub-components of the sentiment indicator stood favourably in relation to their respective long-term averages.

Additional information suggests that in June a marginally higher share of consumers expressed the intention to make major purchases over the subsequent 12 months. Consumers' price expectations remained largely unchanged from March, and thus remained at considerably low levels.

Confidence falls marginally going into the third quarter

Data for the first two months of the third quarter indicate a further marginal decline in the ESI. This fell to 111 in August from 114 in June, still remaining above its long-term average. This was mainly due to a drop in the retail sector, in services and among consumers.

Although the industrial confidence indicator turned positive between June and July, it returned to negative territory in August, reaching -7, lower than the long-run average. This was mainly driven by production expectations and order-book levels, which fluctuated in these two months. The services indicator fell from 25 in June to 22 in August, still remaining above its long-run average.

Similarly, the consumer confidence indicator also fell, returning to negative territory in July and reaching -3 in August, after having turned positive in the second quarter of 2015. This notwithstanding, it still comfortably exceeded its longterm average.