Euro zone economy little affected by debt crisis by now

Over the last week it was visible the effect of last few week’s debt crisis on economic data. The ZEW economic sentiment index fell more than expected in May (from 53 to 45.8 versus market expectations of 47) as institutional investors were concerned that economic growth in the next six months may weaken as a results of uncertainties on peripheral Euro zone countries. However, despite being lower than expected and having worsened in the second half of the month, the index remained well above long term average (27.4), confirming that German economic recovery is expected to continue.

As regards inflation, April figures indicated that headline CPI rose 1.5% y/y and that the CPI core fell from 1% y/y to 0.9% y/y – historical low of the index. April’s figure confirmed that inflationary pressures are subdued due to high unemployment rate and very weak internal demand. Deflationary pressures are likely to emerge in many countries. Should this trend continue, the ECB may decide to cut rates again or decide to not sterilize next government bond purchases.