Economic sentiment deteriorated in May. Following a weaker revised 99.0 in April, this month saw a 2.5 point drop to 96.5. This was nearly 3 points short of the market consensus and its worst reading since last November. May was the eleventh month in which the ESI has been below its 100 long-run average and the trend, which had been broadly flat at the start of the year, is beginning to tilt downwards.

At a sector level, confidence declined again in industry (minus 5.2 after minus 2.8), services (7.0 after 9.9), retail trade (minus 5.3 after minus 0.9) and construction (0.2 after 0.9). It was little changed in the consumer sector (minus 17.4 after minus 17.5).

Regionally, the national ESI improved in France (94.9 after 93.4) but fell in in Germany (95.5 after 98.4), Italy (102.5 after 104.8) and Spain (100.5 after 103.5). Consequently, only Italy and Spain remain above the common 100 historical mean.

Inflation developments were favourable with falls in both manufacturing and service sector selling price expectations complementing a decrease in household inflation expectations.

The slide in the May ESI provides further reason for supposing that second quarter Eurozone growth will be disappointingly soft. However, this will not trouble the ECB unless actual underlying inflation begins to fall more quickly than expected. To this end, Thursday's flash update will be a key pointer to the June policy decision. In any event, today's update leaves both the region's ECDI (minus 42) and ECDI-P (minus 48) deep in negative surprise territory. In other words, overall economic activity continues to run well behind what the forecasters expected.

Economic sentiment, which in April improved marginally to 99.3, is expected to rise marginally in May as well to 99.4.

Released by the European Commission, the economic sentiment index (ESI) provides a broad measure of both business and consumer sentiment. Results are available for all participating countries and aggregated to the Eurozone and European Union level. The survey is very detailed and offers information on demand, output and inflation.

The survey offers key sentiment data across the European Union and the Eurozone region. Data are available for each country and are aggregated for both the Eurozone and EU. It is conducted by the European Commission rather than Eurostat, the compiler of most other EMU data. The index is a broad measure of both business and consumer sentiment in the EU members. Because of its coverage of all the EU countries it is highly regarded in the financial markets as a good indicator of the mood of consumers and industry in each country. It is also normally a good indicator of quarterly GDP.

Confidence indicators are calculated for industry, services, construction, retail trade and consumers. In turn, they are combined into an overall composite number, the economic sentiment indicator (ESI). The data are seasonally adjusted and defined as the difference (in percentage points of total answers) between positive and negative answers. The survey also covers other areas of the economy that are not explicitly included in the ESI. In particular, responses to questions about the inflation outlook are used by the ECB as one means of measuring inflationary expectations.