Economic Confidence indicator in collaboration with AGEFI Luxembourg
The PwC economic barometer decreased by 2 points during May to reach 8 at the end of the month. A drop in industrial confidence, coupled with inflationary pressures and concerns regarding the financial sector for both Europe and Luxembourg were the main drivers behind the two-point drop from the previous month.
Since the start of the conflict in Ukraine, confidence from both businesses and consumers has remained at significantly low levels. Nevertheless, some business sectors remain more confident about the road ahead, as their activities are not heavily affected by the war. For example, the non-financial services industry still displays a resilient profile with little to no reduction in confidence, given the relaxation of Covid-19 related restrictions and an increase in demand. On the other hand, several sectors remain more pessimistic regarding the future outlook, as confidence in the industrial and construction sectors decreased even further during May. In addition, business confidence in the financial sector of the Grand Duchy also deteriorated, given a 6.5% decrease in investment fund assets between January and April 2022 as a result of the market volatility during this period. Despite that, most sectors expect that input prices will continue to rise, hence further fuelling inflation in the country (as a note, inflation reached 7% YoY in April).
Business activity in the Eurozone rose once again during May (Eurozone PMI stood at 54.8), although at a slower pace compared to the previous month. The services sector was once again leading this growth over manufacturing, with the latter being plunged by supply constraints. Nevertheless, the growth in services is showing signs of a slowdown as the demand boost that followed the winter lockdowns is running out of steam. Inflationary pressures remained strong in the euro area during May, with businesses forced to pump up prices in order to maintain reasonable profit margins, given that they were faced with steep increases in fuel and raw materials costs. Regarding the short-term outlook, confidence has decreased further among eurozone businesses and a significant downturn is becoming more likely. Economists predict that as long as demand remains strong at current levels and continues to balance the scale against uncertainty and inflationary pressures, business activity should grow further in the short term.
In an interview with CNBC, the executive director of the International Energy Agency (IEA) highlighted the risk of oil prices remaining elevated during this summer. This would come as a result of several measures to phase Russian oil out of the market for some countries, as well as from pent-up demand from China which is gradually removing its recent lockdowns. He, therefore, states that, unless the Middle East countries step up their oil production significantly, prices will continue on their upward trajectory. To put this into perspective, oil prices have already recorded a more than 10% increase in May, reaching levels last seen briefly in early March and settling at USD 114.7 per barrel at the end of the month. This comes as a stark contrast to oil prices in April when the price of crude was fluctuating between USD 98 and USD 106 per barrel. As the recently announced increases in oil supply from OPEC members failed to cool down prices and with inventories depleted, price pressure is likely to remain at high levels for the coming months.
The monthly PwC barometer, in collaboration with AGEFI Luxembourg, is an economic confidence indicator that is intended to be a simple and pragmatic tool aimed at capturing the economic atmosphere of the Grand Duchy each month.
The indicator is based on a number of sentiment indices published monthly by Eurostat and Sentix, which are based on surveys (businesses, consumers or investors/analysts).
The indicators used are: consumer confidence (EA for euro area and LUX for Luxembourg), industrial confidence (EA and LUX), construction confidence (EA and LUX), financial confidence (EA), retail confidence (EA), services confidence (EA) and the Sentix Index (EA).