Bloomberg News

Euro-Area Confidence Slumps, German Unemployment Rises

June 28, 2012

Euro-Area June Economic Confidence Falls to Lowest Since 2009

Cyprus on June 25 also sought a financial lifeline from the euro area’s firewall funds to “contain the risks to the Cypriot economy, notably those arising from the negative spillover effects through its financial sector, due to its large exposure to the Greek economy,” the government said. Photographer: Chris Ratcliffe/Bloomberg

Economic confidence in the euro area slumped to the lowest in more than 2 1/2 years in June and German unemployment increased more than economists forecast, adding to signs the European economy fell into a recession.

An index of executive and consumer sentiment in the 17- nation euro area dropped to 89.9 from a revised 90.5 in May, the European Commission in Brussels said today. That’s the lowest since October 2009. In Germany, the number of people out of work rose a seasonally adjusted 7,000 to 2.88 million, a separate report showed. Economists in a Bloomberg News survey had forecast a gain of 3,000 in the month.

Rising unemployment in Europe’s largest economy underscores indications of a deepening economic slump as the sovereign-debt crisis shifts from periphery states to core members. European leaders are meeting in Brussels today to discuss ways to stem contagion of the debt turmoil that this month forced Spain and Cyprus to seek aid.

“Germany won’t be able to disconnect from the euro-region developments,” said Christoph Weil, an economist at Commerzbank AG in Frankfurt. “The second quarter will show an economic contraction and there are no signs of improvement for the following three months. Whether the situation stabilizes afterward hinges decisively on the euro crisis and latest developments are no real reason for optimism.”

The euro traded at $1.2432 at 12:50 p.m. in Frankfurt, down 0.3 percent on the day. It has depreciated 6.7 percent against the dollar over the past three months as investors grew more concerned about the specter of a euro breakup.

Declining Confidence

Economists had forecast a drop in euro-area economic confidence to 89.6, according to the median of 27 estimates in a Bloomberg News survey. Germany’s adjusted jobless rate held at 6.8 percent in June, the Nuremberg-based Federal Labor Agency said.

A gauge of sentiment among European manufacturers fell to minus 12.7 from minus 11.4 in May, the commission’s report showed. That’s the lowest since February 2010. An indicator of services confidence dropped to minus 7.4 from minus 5.2, while a gauge of consumer sentiment slipped to minus 19.8 from minus 19.3. Sentiment in the construction industry improved.

“The crisis continues to dominate everything,” said Gerd Hassel, an economist at BHF Bank AG in Frankfurt, before today’s data. “I fear that confidence will continue to decline over the coming months.”

Spain, Cyprus

Spain this week made a formal bailout request for as much as 100 billion euros ($124 billion) for banks. Cyprus on June 25 also sought a financial lifeline to “contain the risks to the Cypriot economy, notably those arising from the negative spillover effects through its financial sector, due to its large exposure to the Greek economy,” the government said.

In Greece, Antonis Samaras, sworn in as the nation’s new prime minister on June 20, has pledged to seek relief from austerity measures imposed on his country while keeping the bailout funds flowing.

Spanish 10-year bond yields rose to 6.98 percent, edging toward the 7 percent level that forced Greece, Ireland and Portugal into bailouts.

Still, Luxembourg Prime Minister Jean-Claude Juncker, who leads the group of 17 euro-area finance ministers, signaled a possible agreement, saying he expects “that we can calm markets on this point in the coming days.”

‘Getting Bigger’

“The summit won’t solve the problems,” Commerzbank’s Weil said. “I’m relatively certain that Spain will ask for financial help over the coming weeks. The sums keep getting bigger. They’d have to come up with a different solution for Italy. With normal instruments, Italy won’t be saved.”

Billionaire investor George Soros said in an interview with Bloomberg Television on June 24 that failure to reach an agreement at the summit could be “fatal,” when calling on Europe to start a fund to buy Italian and Spanish bonds.

“Not for the first time, the single currency is waiting for a European summit to offer renewed hope and some light at the end of the tunnel,” Simon Smith, chief economist at FXPro in London wrote ahead of today’s report. “As the past few weeks have shown, the ability of supposedly supportive events to prop up the single currency is getting ever weaker.”

Euro-area services and manufacturing output contracted for a fifth month in June. In Germany, whose economic expansion helped prevent the euro-region economy from sliding into a contraction in the first quarter, investor confidence slumped more than economists forecast this month and business confidence fell to the lowest in more than two years.

‘Challenging Times’

At least seven euro nations are in recessions, eroding export demand from within the currency bloc and leaving companies reliant on markets abroad as global growth falters. In the U.S., the world’s largest economy, consumer confidence dropped in June for a fourth month and more Americans probably filed claims for jobless benefits in the week ended June 23, according to a Bloomberg survey.

Indian Prime Minister Manmohan Singh yesterday pledged to restore confidence in Asia’s third-largest economy after growth slowed to the weakest in almost a decade. At “the current juncture, we are passing through challenging times economically,” Singh said in a statement.

Indicators of euro-zone manufacturers’ production expectations and export order books fell in June, while a gauge of employment expectations also fell, the commission said. An indicator of manufacturers’ selling-price expectations fell to minus 1.3 in June. That’s the first negative reading since February 2010, according to data on the Bloomberg system.

‘Not in Sight’

Commerzbank AG, Germany’s second-largest lender, said on June 26 that it will close its commercial real-estate and ship- finance businesses. Commerzbank decided to “further reduce risks in a consistent manner” as “a swift end to the euro crisis is not in sight,” Chief Executive Officer Martin Blessing said in an internal document to employees.

The European Central Bank earlier this month kept its benchmark interest rate at 1 percent, matching a record low, with President Mario Draghi saying “a few” officials had opted for a cut, fueling speculation the central bank may move as soon as next month. The Frankfurt-based ECB will hold its next assessment on July 5.

“June’s decline in euro-zone economic confidence adds to growing evidence that the euro-zone economy contracted pretty sharply in the second quarter,” said Martin van Vliet, an economist at ING Bank in Amsterdam. “If no additional short- term measures were to come out of the summit, we can only hope that the ECB will act as a bridge to the ‘road map’ and cut interest rates next week.”

To contact the reporters on this story: Simone Meier in Zurich at smeier@bloomberg.net; Rainer Buergin in Berlin at rbuergin1@bloomberg.net

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


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