Euro-area confidence falls as low inflation alarms ECB
By Angeline Benoit & Alessandro Speciale
Euro-area economic confidence fell more than forecast, Spanish consumer prices dropped the most in five years and German unemployment unexpectedly rose in a burst of data backing Mario Draghi’s warning that more stimulus may be needed.
An index of executive and consumer sentiment fell to 100.6 this month from 102.1 in July, the European Commission in Brussels said on Thursday. That’s the lowest this year and missed the median estimate in a Bloomberg survey for 101.5. Separately, Spanish consumer prices fell 0.5 percent. While the decline was less than forecast, it’s still the biggest since 2009.
With investors’ price expectations for the euro area sliding, inflation at the weakest since 2009 and unemployment remaining stubbornly high, Draghi has signaled he’s moving closer toward quantitative easing. Manufacturing and services growth slowed in August amid rising political tensions in Ukraine and the Middle East, after the 18-nation economy stagnated in the second quarter.
“Major eurozone countries have seen a classic hit to confidence, even if it is difficult to assess to what extent it is a psychological issue or whether this is more driven by fundamentals,” said Andreas Rees, an economist at UniCredit in Frankfurt. “Still, QE remains unlikely. What’s more likely is a soft patch, as I can’t imagine we’re heading toward a worst case scenario such as outright deflation.”
In the two hours between the release of the Spanish inflation data and euro-region confidence, Germany’s Federal Labor Agency said the number of people out of work unexpectedly climbed a seasonally adjusted 2,000 to 2.901 million in August. Economists forecast a decline of 5,000, according to the median of 30 estimates in a survey.
The adjusted jobless rate was unchanged at 6.7 percent, the lowest level in more than two decades.
Germany's economy shrank last quarter and the Ifo index of business sentiment declined for a fourth month in August. The Bundesbank has warned that an anticipated rebound in the second half of the year is now in doubt.
“The German economy is not in as good a shape as it was at the beginning of the year,” said Michael Holstein, an economist at DZ Bank AG in Frankfurt. “The labor market is still strong but if the economic outlook worsens further, we’ll see the effect on employment later in the year.”
ECB policy makers meeting next week are set to debate whether the unprecedented range of measures announced in June that included a negative deposit rate and targeted long-term loans are enough to steer the euro area away from deflation and foster growth. One guide the Frankfurt-based central bank can turn to is new economic forecasts to be published on Sept. 4.
The Governing Council will use “all the available instruments needed to ensure price stability” and is “ready to adjust the policy stance further,” Draghi said last week in Jackson Hole, Wyoming. He pointed out that the ECB’s preferred gauge of inflation expectations had fallen below 2 percent.
Companies’ performance and their business outlook have diverged. Adidas AG, the world’s No. 2 sports-gear maker, cut its profit forecast for 2014. Meanwhile, Europe’s largest tiremaker Michelin & Cie. (ML) has said it expects an improvement in European markets in the second half.
Alexandre Ricard, Chief Operating Officer, of Pernod Ricard SA, the world’s second largest distiller, said today he anticipates a “gradual improvement in our sales growth” against a backdrop that will “remain challenging.”
The European Commission said that industrial confidence fell to minus 5.3 in August from minus 3.8 in July and construction sentiment dropped to minus 28.4 from minus 28.2. Sentiment in the services industry declined to 3.1 from 3.6. Consumer confidence was at minus 10, in line with a preliminary reading on Aug. 21.
EU Economic Affairs Commissioner Jyrki Katainen said while the decline wasn’t surprising given weak growth and geopolitical tensions, it “nonetheless is a source of concern.”
“Sentiment has taken some hits in the past months in relation with the conflict in Russia-Ukraine,” said Pernille Bomholdt Nielsen, an analyst at Danske Bank A/S in Copenhagen. “Still, activity in the second half should be supported by private consumption while the negative impact from a strong euro and declines in lending should be less strong.”
The euro-area economy will grow 0.3 percent this quarter and 0.4 percent in the final three months of the year, according to a separate survey of economists. [Bloomberg]