Business and consumer confidence across the eurozone improved in August, signaling potential support for investment and household spending despite ongoing uncertainties related to the conflict involving Iran. The European Commission reported on Friday that its Economic Sentiment Indicator (ESI) increased to 98.4 from 97.1 in July, moving closer to the long-term average of 100. This figure exceeded economists’ forecasts, which predicted a rise to 97.5, and marked the highest level since January, prior to the outbreak of war in the Middle East.
Economic sentiment experienced a significant decline in March after U.S. and Israeli military actions against Iran caused energy prices to surge, raising concerns about reduced consumer purchasing power and potential drag on business investment and hiring. However, the latest data suggest these worries have diminished considerably, even as energy costs remain elevated.
Jack Allen-Reynolds, deputy chief eurozone economist at Capital Economics, noted that the indicator “suggests that the economy has continued to expand in spite of higher energy prices and extreme summer heat.” In the months before the conflict, the eurozone’s economic confidence had been on an upward trajectory, supported by macroeconomic resilience and Germany’s announcement of a substantial investment plan exceeding $1.4 trillion aimed at infrastructure and defence, which bolstered expectations for broader growth.
The eurozone economy demonstrated robust performance in the second quarter, with European Union statistics showing an annualized growth rate of 1.8 percent, outpacing the United States. Although Germany’s growth figures were subsequently revised upward, France’s statistics agency reported on Friday that it experienced stagnation during the same period, revising earlier estimates of modest growth.
Minutes from the European Central Bank’s (ECB) July meeting, published on Thursday, highlighted a more optimistic view among policymakers, who saw reduced risks to growth due to improving confidence indicators. The ECB noted that economic expansion might be stronger than initially projected if the eurozone’s economy and energy markets adapt quickly to disruptions stemming from the Middle East conflict.
The survey also showed a decline in businesses’ expectations for selling prices in retail and industrial sectors, a key inflation measure monitored by the ECB. This suggests limited second-round inflationary effects from the energy price shock, as wage growth is also expected to slow this year. The ECB’s July meeting minutes emphasized there were no clear signs yet of rising energy costs leading to broader inflation pressures.
Nonetheless, inflation remains a significant concern, with investor sentiment pointing toward a likely increase in the ECB’s key interest rate at its September 10 meeting, as price growth continues to surpass the central bank’s 2 percent target.