Euro-Area Confidence Gets Boost From Services as Economy Reopens

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Confidence in the euro-area economy improved in May to the highest level in more than three years as restaurants, hotels and shops across the region start to reopen and faster vaccine roll-outs support the recovery.

A European Commission sentiment index increased to 114.5, exceeding most estimates in a Bloomberg survey. The gain was driven by surging optimism in services, though industry, retail trade and construction also saw improvements.

The data add to evidence that companies and consumers have turned a page on the difficult start to the year that saw only slow progress on inoculations and repeatedly extended lockdowns. Now many countries are gradually loosening coronavirus curbs, bolstering prospects for a rebound in demand during the summer months.

In May, confidence increased “markedly” in all of the six largest European Union countries. Euro-area services posted the third significant improvement in a row, with managers more optimistic about the past business situation as well as expectations for demand.

Sentiment among consumers increased for a fourth consecutive month, and employment expectations also rose sharply.

The economy is underpinned by massive monetary and fiscal stimulus. The European Central Bank has promised to ensure companies and households get the financing they need at favorable terms to support a recovery. It next sets policy on June 10, when it will also discuss new economic projections.

Policy makers including President Christine Lagarde have signaled the ECB could continue to buy bonds at an accelerated pace to stem a rise in government bond yields, after some of her colleagues argued the economy might be strong enough to cope with less stimulus as early as July.

Economists and investors are scaling back expectations for a slowdown in support, and Bloomberg Economics is now forecasting buying will hold at about 85 billion euros ($103 billion) a month in the third quarter.

One potential area for concern is a supply squeeze in manufacturing that’s pushing up costs. While industrial sentiment improved in May on the back of managers’ assessment of current orders, production expectations declined.

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