Bloomberg News

European Economic Confidence Declines More Than Forecast

September 29, 2011

(Updates euro trading in fifth paragraph. See EXT4 <GO> for more on the European debt crisis.)

Sept. 29 (Bloomberg) -- European confidence in the economic outlook dropped more than economists forecast in September to the lowest in almost two years, reflecting growing concern that the worsening debt crisis could push the euro region into a recession.

An index of executive and consumer sentiment in the 17- nation euro area fell to 95 from a revised 98.4 in August, the European Commission in Brussels said today. That’s the lowest since December 2009 and below 96 projected by economists, according to the median of 31 estimates in a Bloomberg survey.

Europe’s economy is showing increasing signs of a slowdown as governments struggle to contain the fiscal crisis and avert a Greek default. About three-quarters of global investors surveyed by Bloomberg this week anticipate the euro region will fall into a recession during the next 12 months, with more than a third predicting the European debt crisis will derail the world economy in that period.

“The escalating sovereign-debt crisis and the resulting tensions in the banking sector are clearly weighing on sentiment and activity,” said Aline Schuiling, an economist at ABN Amro Bank NV in Amsterdam. “Indeed, we expect the economy to contract in the third and fourth quarter.”

The euro was higher against the dollar amid speculation German lawmakers will approve the expansion of the euro-area bailout fund to help contain the debt crisis. The euro traded at $1.3649 at 12:15 p.m. in Frankfurt, up 0.8 percent on the day.

First Time

Manufacturing and services output contracted for the first time in more than two years in September, euro-area data showed last week. In Germany, Europe’s largest economy, business sentiment decreased for a third month in September and investor confidence dropped to the lowest in more than 2 1/2 years.

A gauge of sentiment among European manufacturers dropped to minus 5.9 in September from minus 2.7 in the previous month, today’s report showed. An indicator of services confidence fell to zero from 3.7, while a measure of consumer confidence decreased to minus 19.1 from minus 16.5. Sentiment among builders also worsened in September. The commission had previously reported an August reading of 98.3 for the overall confidence indicator.

The International Monetary Fund on Sept. 20 cut its euro- region growth forecast for this year and next to 1.6 percent and 1.1 percent, respectively. The Washington-based IMF had previously forecast the economy to expand 2 percent this year and 1.7 percent in 2012. The European Central Bank forecasts 2012 growth of about 1.3 percent.

Output Expectations

A gauge of euro-region manufacturers’ output expectations dropped to 0.2 from 5.9 in the previous month, today’s report showed. An indicator of order books slumped to minus 11.8, the lowest since October, while a gauge of employment expectations declined to minus 0.4 from 1.3 in August.

“A recession is becoming increasingly likely,” said Christoph Weil, an economist at Commmerzbank AG in Frankfurt, after today’s report. “The escalating fiscal crisis is becoming an increasing concern to companies and consumers.”

International finance ministers and central bankers at a meeting in Washington earlier this month urged European officials to intensify efforts to contain the region’s debt crisis as Greece teetered on the edge of default. President Barack Obama said yesterday that Europe’s debt turmoil continues to be a drag on the U.S. economy.

Worsening Turmoil

“In Europe, we haven’t seen them deal with their banking system and their financial system as effectively as they needed to,” Obama said yesterday in Washington.

More than half of the respondents in Bloomberg’s quarterly Global Poll predicted that banking-industry turmoil will worsen, according to the survey of 1,031 investors, analysts and traders who are Bloomberg subscribers. Eighty-eight percent said the region’s economy is deteriorating.

“For the next 12 months, the global economy will slow materially with advanced economies struggling to grow much above zero,” Mohamed El-Erian, chief executive officer of Pacific Investment Management Co., said on Sept. 24. “Emerging economies will maintain faster growth, albeit not as high as the last 12 months.”

ECB Governing Council members Ewald Nowotny and Luc Coene said the central bank may look at stepping up efforts to boost growth as soon as next month. They both identified renewed 12- month lending to banks as an option. ECB Executive Board member Lorenzo Bini Smaghi said on Sept. 26 that it’s important to “reassure the markets.”

ECB Pressure

Economists at Barclays Capital, JPMorgan Chase & Co. and Royal Bank of Scotland Plc predict the ECB will be forced to reverse course on interest rates after raising the benchmark twice this year to 1.5 percent. In the U.S., the Federal Reserve has already pledged additional economic stimulus.

“Pressure on the ECB to cut rates appears to be increasing by the day,” said analysts including Simon Smith at foreign- exchange broker FXPro Group Ltd. in London in an e-mailed note before today’s data were released. “A rate cut before the G-20 meeting on Nov. 3-4 is more likely than not and would confirm our long-held belief that both the ECB’s rate increases were misguided.”

The ECB will hold its next rate meeting on Oct. 6. President Jean-Claude Trichet, who will retire at the end of October, said last month that downside risks to the region’s economic outlook have “intensified.” Trichet, 68, will be replaced by Italy’s Mario Draghi.

Alan McQuaid, chief economist at Bloxham Stockbrokers in Dublin, said December may be the “most likely month” for the ECB to cut borrowing costs if the central bank decides to lower interest rates before year-end.

“There are substantial barriers” to lowering rates in October, McQuaid said. “Not least that the meeting would conclude Trichet’s term of office with a dramatic U-turn.”

--With assistance from Simon Kennedy in London and Kristian Siedenburg in Budapest. Editors: Patrick Henry, Jones Hayden

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

To contact the editor responsible for this story: Matthew Brockett at mbrockett1@bloomberg.net


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