Economic confidence in the euro area declined more than economists forecast in May to the lowest in 2 1/2 years after inconclusive Greek elections raised the specter of a euro breakup and Spain struggled to shore up its banks.
An index of executive and consumer sentiment in the 17-nation euro area fell to 90.6 from a revised 92.9 in April, the European Commission in Brussels said today. That’s the lowest since October 2009 and below the 91.9 forecast by economists, according to the median of 28 estimates in a Bloomberg survey.
Europe’s economic slump shows signs of deepening after Greece failed to form a government following May 6 elections while Spain struggles to clean up its banks amid recession and unemployment of more than 20 percent. Citigroup Inc. economists forecast Greece could leave the euro area by next year. Euro-zone manufacturing and services output contracted more than economists estimated in May and German business sentiment had the steepest decline since August.
“All second-quarter sentiment indicators seem to signal a fall back into recession territory,” said Peter Vanden Houte, an economist at ING Group in Brussels. “European leaders will have the difficult task to find a way out of this doom loop.”
The euro extended its decline against the dollar after the data and traded at $1.2439 at 11:44 a.m. in Brussels, down 0.5 percent on the day at a two-year low. The Stoxx Europe 600 dropped as much as 1.1 percent and Standard & Poor’s Index futures fell 0.7 percent.
A gauge of sentiment among European manufacturers fell to minus 11.3 from minus 9 in April, today’s report showed. That’s the lowest since February 2010. An indicator of services confidence dropped to minus 4.9 from minus 2.4, while a gauge of consumer sentiment rose to minus 19.3 from minus 19.9. Sentiment in the construction industry also declined this month.
The European Central Bank said today that loans to households and companies in the euro zone grew at the slowest pace in two years in April as the crisis curbed demand for credit. The central bank has flooded markets with more than 1 trillion euros ($1.2 trillion) in three-year loans at its benchmark interest rate, which is at a record low of 1 percent.
Confidence may continue to deteriorate after the Greek elections on May 6 failed to produce a government and saw an increase in support for parties opposed to austerity measures. Seventy-seven percent of Greeks say the terms of the bailout should be revised, a poll by GPO SA showed today. The country will hold new elections on June 17.
Citigroup economists, who earlier forecast departure chances at as much as 75 percent, now are assuming as a “base case” that Greece will leave on Jan. 1, 2013.
In Spain, the fourth-biggest economy in the euro, Prime Minister Mariano Rajoy said on May 16 there is a risk investors will stop lending or charge “astronomical prices” as his government tries to shore up banks and help the nation’s cash-strapped regions.
“New elections in Greece and the Spanish banking crisis are fueling uncertainty among consumers and companies,” said Heinrich Bayer, an economist at Deutsche Postbank AG (DPB) in Bonn. “The euro-region economy will have a weak second quarter, or stagnation with a downward risk. We still see a moderate recovery in the second half unless the crisis worsens further.”
Credit Agricole SA (ACA), France’s third-largest bank by market value, on May 11 reported a 75 percent drop in first-quarter earnings, hurt by Greek losses.
“The election results increased the complexity of a situation that was already tense,” Credit Agricole Chief Executive Officer Jean-Paul Chifflet told reporters on that day. “We’ve been working for several quarters on this worry” that Greece may leave the euro.
With European austerity measures undermining consumer spending and economies from Spain to Italy in recessions, companies have been forced to lower costs to protect earnings. Euro-area unemployment probably rose to 11 percent in April from 10.9 percent in the previous month, a Bloomberg survey shows. That would be a euro-era record. The European Union’s statistics office will release the jobless data on June 1.
Deutsche Lufthansa AG (LHA) said today that it may cut as many as 1,000 jobs at LSG Sky Chefs, the world’s largest in-flight caterer, to reduce expenses. Europe’s second-biggest airline, which employs 120,000 people worldwide, is already cutting 3,500 administrative positions, or 20 percent of the total.
“In terms of what will stop this -- you need growth, which will take a while, and the second is, we need some kind of structural reform,” said Alexander Friedman, chief investment officer at UBS AG (UBSN), in an interview with Bloomberg Television from Zurich yesterday. “If you look over the next six months, ultimately the incentives are” there to keep “the euro zone all together. We’re possibly at an inflection point.”
Europe’s economy may struggle to gather strength in the current quarter after stalling in the previous three months as Germany shows signs of faltering. Investor confidence in Europe’s largest economy fell from a two-year high in May and business sentiment dropped more than economists had forecast.
Metro AG (MEO), Germany’s largest retailer, on May 23 reiterated its forecast that profit won’t increase this year, with CEO Olaf Koch forecasting “continued economic instability.” LVMH Moet Hennessy Louis Vuitton SA (MC), the world’s largest maker of luxury goods, said last month it will “maintain a strict control over costs” given the situation in Europe.
In China, state-run Xinhua News Agency reported yesterday that the government has no plan to introduce stimulus measures to support growth on the scale unleashed during the depths of the global financial crisis in 2008. That follows data showing trade below forecasts in April and industrial production rising the least since 2009.
Elsewhere in the Asia-Pacific region, Australian retail sales unexpectedly fell 0.2 percent in April from the previous month, a report showed today. New Zealand’s home-building approvals declined 7.2 percent in April from March.
A gauge of euro-zone manufacturers’ production expectations dropped to minus 3.3 from minus 1.6 in April, today’s report showed. An indicator of export order books fell to minus 19.6 from minus 17.3, while an index of employment expectations also declined from April. A gauge measuring service companies’ expectations of demand over the next three months fell to 0.6 from 3.2 and consumers also grew more pessimistic in their financial situation over the coming year.
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