Bloomberg News

Europe Economic Confidence Drops to Lowest in Almost 2 Years

October 27, 2011

(Adds euro trading in fifth paragraph. See EXT4 for more on the European debt crisis.)

Oct. 27 (Bloomberg) -- European confidence in the economic outlook dropped to the lowest in almost two years in October as the region’s economic slump deepened and leaders struggled to contain a worsening debt crisis.

An index of executive and consumer sentiment in the 17- nation euro area fell to 94.8 from 95 in September, the European Commission in Brussels said today. That’s the lowest since December 2009. Economists forecast a drop to 93.8, the median of 27 estimates in a Bloomberg survey shows.

The euro-area economy is edging toward recession as governments toughen austerity measures to contain the fiscal crisis just as global demand falters. European services and manufacturing output contracted at the fastest pace in more than two years in October. At a Brussels summit that ended early this morning, leaders reached agreement on debt-relief for Greece and on a plan to bolster the region’s rescue fund.

“We’re seeing a marked economic slowdown with the current quarter likely to show a contraction,” said Andreas Scheuerle, an economist at Dekabank in Frankfurt. “Companies and consumers, faced with an uncertain outlook, tend to become more cautious. Talk of recession has gained momentum.”

The euro was higher against the dollar, trading at $1.3988 at 10:16 a.m. in London, up 0.6 percent on the day.

Adding to signs of a deepening slowdown, euro-region manufacturing and services output contracted for a second month in October. In Germany, Europe’s largest economy, business sentiment dropped to the lowest in almost two years this month and investors also grew more pessimistic.

‘Difficult Environment’

A gauge of sentiment among European manufacturers dropped to minus 6.6 in October from minus 5.9 in the previous month, today’s report showed. An indicator of services confidence rose to 0.2 from 0.0, while a measure of consumer confidence decreased to minus 19.9 from minus 19.1.

Daimler AG, the world’s third-largest maker of luxury vehicles, today reported a quarterly profit decline for the first time in two years amid slowing sales growth. Shares of Stuttgart, Germany-based Daimler have fallen 25 percent this year as investors fear the debt crisis will burden demand for cars and trucks.

Schneider Electric SA, the world’s biggest maker of low-and medium-voltage equipment, on Oct. 20 cut its 2011 earnings target for a second time in four months and said it may cut jobs. Third-quarter revenue stalled in Western Europe, the Rueil-Malmaison, France-based company said.

“Western Europe is stagnating in the third quarter, which points to a more uncertain and difficult environment,” Chief Financial Officer Emmanuel Babeau said on that day. “We’re going to make more restructuring and adjustments.”

Asian Markets

A gauge of euro-region manufacturers’ output expectations dropped to minus 0.1 from 0.3 in the previous month, today’s report showed. An indicator of order books slumped to minus 13, while a gauge of employment expectations declined to minus 2.4.

Some companies have relied on faster-growing economies to spur sales. LVMH Moet Hennessy Louis Vuitton SA, the world’s biggest maker of luxury goods, on Oct. 18 reported third-quarter sales that beat analyst estimates. On a local-currency basis, nine-month sales jumped 27 percent in Asia, 18 percent in the U.S. and 7 percent in Europe.

“In the current environment, most people are looking for reasons to be worried rather than to be optimistic,” the Paris- based company’s CFO Jean-Jacques Guiony said on that day. “We are very proud obviously to disappoint pessimists as our businesses, by and large, continue to operate in the same environment as they have since the beginning of the year.”

‘Thumbs Up’

In Europe, leaders at the Brussels meeting persuaded bondholders to take 50 percent losses on Greek debt and agreed to boost the firepower of the euro-area rescue fund to 1 trillion euros ($1.4 trillion). The summit, which ended about 4 a.m. this morning, also produced measures on bank recapitalization, a potentially bigger role for the International Monetary Fund, a commitment from Italy to do more to cut its debt and a signal from leaders that the European Central Bank will maintain bond purchases.

“My first reaction is thumbs up,” Andreas Nigg, who helps oversee about $48 billion at Vontobel Asset Management in Zurich, told Bloomberg Television in an interview today, when asked about the Brussels meeting. “It seems like it’s big enough to alleviate some of the fears.”

Leaders of the Group of 20 nations will meet in Cannes, France, next month to discuss the region’s turmoil, which has rattled global equity markets and clouded growth prospects.

Job Cuts

Deutsche Bank AG, Germany’s largest lender, on Oct. 4 scrapped its profit forecast and announced 500 job cuts and further writedowns of Greek bond holdings, citing a “significant and unabated slowdown in client activity.” Chief Executive Officer Josef Ackermann said on that day the “operating environment was more difficult than at any time since the end of 2008” in the third quarter.

“The economic outlook has turned increasingly bleak,” Volker Kronseder, CEO of German packaging-equipment maker Krones AG, said in a statement yesterday. “If the turmoil on the capital markets drags the global economy down, our business will not be left completely unscathed.”

The ECB has introduced a number of unconventional tools to address the crisis, including flooding the banking system with cash to prevent a credit crunch and buying government bonds. President Jean-Claude Trichet, who will retire at the end of October, said this month the bank will also resume purchases of covered bonds.

The central bank has so far ignored calls for a rate cut, keeping the benchmark at 1.5 percent. Council members will meet for their next monthly assessment on Nov. 3 in Frankfurt.

“It’s not about anger, that someone has done something wrong, it’s about how we get out of this,” David Bloom, global head of currency strategy at HSBC Holdings Plc, told Bloomberg Television from London yesterday. “It’s everybody’s problem. A breakup of the euro would be absolutely devastating.”

Capacity utilization in the manufacturing industry declined in the fourth quarter to 79.7 percent from 80.8 percent in the previous period, today’s report showed.

--With assistance from Francois de Beaupuy and Andrew Roberts in Paris, Kristian Siedenburg in Budapest, Richard Weiss in Frankfurt and Francine Lacqua and Mark Barton in London. Editors: Jones Hayden, Andrew Clapham

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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