Bloomberg News

Europe June Economic Confidence Drops to Lowest in 8 Months

June 29, 2011

(Updates with comment from economist in fourth paragraph.)

June 29 (Bloomberg) -- European confidence in the economic outlook dropped to the lowest in eight months in June as policy makers struggled to craft a second bailout package for Greece.

An index of executive and consumer sentiment in the 17- nation euro region fell to 105.1 from 105.5 in May, the European Commission in Brussels said today. That’s the lowest since October. Economists had forecast a decline to 105, the median of 27 estimates in a Bloomberg survey showed.

The euro-area recovery may falter after expanding at the fastest pace in almost a year in the first quarter as governments toughen budget cuts to keep Greece’s fiscal crisis from spreading. European leaders are trying to agree on a deal to prevent a Greek debt restructuring. In Germany, Europe’s largest economy, investor confidence dropped this month and European services and manufacturing growth weakened.

“The recent economic headwinds and the escalation of the Greek crisis are clearly weighing on the mood of businesses and consumers,” Martin van Vliet, an economist at ING Groep NV in Amsterdam, wrote in an e-mailed note. The euro-region recovery “is slowly but surely losing steam.”

The euro was little changed against the dollar after the data, trading at $1.4391 at 11:18 a.m. in Frankfurt, up 0.1 percent on the day.

A gauge of sentiment among European manufacturers dropped to 3.2 from 3.8 in the previous month, today’s report showed. An indicator of services confidence rose to 9.9 from 9.3, while a measure of consumer confidence increased to minus 9.8 from minus 9.9. Sentiment among builders also improved in June.

‘Spillover Effects’

European governments are seeking ways to contain the region’s debt crisis as investors grow increasingly concerned that Greece won’t be able to repay its debt after last year’s 110 billion-euro ($157 billion) bailout. Greek lawmakers cast ballots today and tomorrow on the austerity measures, a condition for more foreign aid needed to prevent a default.

“There’s a huge amount of effort going on in Europe to prevent the worst possible case coming out of Greece,” Russel Jones, global head of fixed-income strategy at Westpac Banking Corp., told Linzie Janis on Bloomberg Television’s “First Look” from Sydney today. “Policy makers are very worried about spillover effects. We’re not out of this mess yet.”

Budget Gaps

With governments cutting spending and raising taxes to plug their budget gaps, companies have relied on faster-growing economies to boost sales. Prada SpA, the Milan-based maker of Miu Miu bags, on June 3 forecast growth of at least 46 percent in first-half profit, helped by an Asian expansion.

The German economy has helped power the region’s expansion as companies boost output and spending to meet export demand. Business confidence in Germany unexpectedly improved in June and services growth accelerated, recent data showed. Unemployment probably fell last month, according to a Bloomberg survey. The Nuremberg-based Federal Labor Agency will release the report tomorrow.

Daimler AG, the world’s largest maker of heavy-duty vehicles, said on June 21 it plans to sell 20 percent more Mercedes-Benz trucks this year. Volkswagen AG, Europe’s biggest carmaker, is on track for “distinct growth” and a “very successful” business year in 2011, Chief Executive Officer Martin Winterkorn said earlier this month.

Debt Crisis

An indicator of German manufacturing confidence slipped to 11.8 in June from 13.3 in the previous month, today’s report showed. A gauge of euro-area manufacturers’ order books rose to minus 1.6 from minus 2.7 and an indicator of production expectations slipped to 11.6 from 12.9. A gauge of employment expectations declined from May and companies were also more pessimistic about their export order books.

While the European Central Bank on June 9 lowered its euro- region growth forecast for next year to 1.7 percent from 1.8 percent, President Jean-Claude Trichet signaled concern about oil-driven price pressures feeding into wage demands.

Euro-area inflation slowed to 2.7 percent in May from 2.8 percent in the previous month, staying above the central bank’s 2 percent limit. ECB Executive Board member Juergen Stark said on June 27 that the central bank is “very vigilant” and ready to raise the benchmark interest rate further from 1.25 percent.

A gauge of service companies’ selling-price expectations slipped to 7.5 from 9.6 in May. Households indicated they were more optimistic about their financial situation over the coming 12 months, while a gauge measuring consumers’ willingness to make major purchases over that period rose to minus 24.1 from minus 27. An indicator of consumers’ assessment in price developments over the coming year slipped to 24.7 from 27.4.

The ECB will hold its next rate meeting on July 7.

--With assistance from Kristian Siedenburg in Budapest, Zoe Schneeweiss in Vienna and Andrea Catherwood in London. Editors: Jones Hayden, Jennifer M. Freedman

To contact the reporter on this story: Simone Meier in Zurich at smeier@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net


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