Bottom line: Today's European Commission (EC) survey of euro area business and consumer confidence supports the uptrend discernible in the PMI industrial and service sector data, suggesting that the business and consumer sectors overall have been shrugging off so far the tensions that had emerged in financial markets in recent months.
 
That said, a stark contrast is continuing to emerge between confidence levels in Germany and other major economies. In Germany production expectations and export orders are strongly above their long-term trend (L/T), while capacity utilisation is closing the gap vs its long-term average much more quickly than elsewhere.

As well, a sharp rise in German consumer sentiment in July was largely behind the improvement in euro area consumer sentiment, as fears of unemployment in Germany have been sharply scaled back as the labour market and hiring intentions improve (see our earlier comment). In contrast, some of the Spanish confidence data have been worsening (eg, business services, retail and construction), while the Greek confidence readings are exceptionally negative. The EC noted that in addition to Germany, there were (smaller) improvements in economic sentiment in France and Italy.
 
Overall, our interpretation of today's data is that as the fiscal austerity programmes progressively bite in certain countries (Greece, Portugal and Spain) so clearly this is likely to keep a lid on an improvement in their domestic demand. Meanwhile, Germany is very clearly driving the euro area economy, and it is encouraging that there are some signs, via an improving labour market, the momentum in its export sector may be feeding through into consumer sentiment, retail sector confidence and hiring intentions more broadly.

In conclusion, today's data illustrate that the euro area remains very dependent upon a vibrant export sector to sustain recovery at a time when progressive fiscal tightening is likely to keep a lid on recovery in domestic demand. In other words, the euro area needs the euro to be depreciating rather than appreciating from here, in order to nurture the re-balancing and help to reverse the uptrend in unemployment.
 
 
 
source: BarCap