Since the war in Ukraine started, the Economic Sentiment Index (ESI) has been much weaker than before. Historically it is at quite a strong level but is not tied to an economic recession, currently hovering around 105.
Yet, the annual inflation rate in the Euro area increased to 8.1% in May 2022, which represents a fresh record high compared to the previous months. Estimates show that energy prices continue to grow, followed by food, alcohol, and tobacco.
Meanwhile, shares of major bank stocks in the Eurozone have lost 1% in today’s session at the time of writing.
Standing on wobbly legs
European equity markets mostly dropped at the market open as stubborn inflation fears have resurfaced. Apparently, the French economy shrank in the first quarter, while the CAC 40, the French stock index, lost 0.6% at the time of writing.
Societe Generale SA (EPA: GLE) and BNP Paribas SA (EPA: BNP), the two major banks in France, have lost 17.5% and 12.4% year-to-date (YTD), respectively.
Meanwhile, Frankfurt’s benchmark DAX index lost 0.7% at the time of writing, with Deutsche Bank AG (ETR: DBK) losing 8.45% YTD. Following this trend were Italian banks UniCredit SpA (BIT: UCG), Intesa Sanpaolo SpA (BIT: ISP) and Mediobanca Banca (BIT: MB) dropping 20.81%, 13.45% and 6.34% YTD.
On the other hand, all of the bank stocks recorded increases in their share prices for May, with Unicredit leading the way with a 25.73% gain over the month.
On the whole, services and goods rose from 13.6 to 14 in May, as demand surged due to the pandemic reopening, which plays in Eurozone’s favor.
There may be pessimism about the financial situation caused by inflation and rising energy costs. Yet, people look likely to spend again after long periods of limitations caused by the Covid lockdowns.
In summary, the economic environment is showing modest signs of slowing; however, post-pandemic spending and growth could boost economic growth enough to counteract some of the negative effects of inflation.
The pressure will be on the European Central Bank (ECB) to reign in inflation and provide growth for the Eurozone.