European Confidence Rises to Highest Since March 2008

European manufacturing industries slowed this month
A Siemens AG employee assembles a component for gas turbine propellers in Berlin. Photographer: Michele Tantussi/Bloomberg

European confidence in the economic outlook improved to the highest in more than two years in August after surging exports helped the economy expand at the fastest pace in four years in the second quarter.

An index of executive and consumer sentiment in the 16 euro nations rose to 101.8 from a revised 101.1 in July, the European Commission in Brussels said in an e-mailed statement today. That’s the highest since March 2008 and exceeded economists’ forecast for an increase to 101.6, based on the median of 28 estimates in a Bloomberg News survey.

European confidence may falter as the global recovery shows signs of weakening and governments step up spending cuts to trim budget deficits. The U.S. economy expanded less than initially anticipated in the second quarter and growth in Europe’s services and manufacturing industries slowed this month.

“There’s no reason why the euro region would be able to decouple from a global slowdown,” said David Kohl, deputy chief economist at Julius Baer Group in Frankfurt. “At the same time, we’re facing a period of fiscal consolidation across Europe, which will weigh on growth. It will be a bumpy road.”

The euro remained lower against the dollar after the report, and was down 0.3 percent to $1.2719 as of 10:05 a.m. in London. Bonds stayed higher, with the yield on the 10-year German bund down 4 basis points to 2.16 percent.

Cooling Economy

A gauge of confidence among consumers rose to minus 11 in August from minus 14 the previous month, today’s report showed. Manufacturing sentiment held at minus 4 and construction confidence remained at minus 29. Confidence within the service industries rose to 7 from 6.

The index is based on a survey of 130,000 executives and 40,000 consumers conducted in the first two weeks of the month.

European manufacturers have relied on faster-growing emerging economies to fuel earnings as households held back spending. German exports surged 8.2 percent in the second quarter, helping to power record economic growth. Bayerische Motoren Werke AG, the world’s largest maker of luxury cars based in Munich, said on Aug. 9 that sales rose 9.1 percent in July, spurred by demand from China.

Companies may find it hard to maintain revenue growth as the global economy cools. U.S. economic expansion slowed to 1.6 percent in the second quarter, lower than a 2.4 percent estimate issued last month. In the U.K., a gross-domestic-product report on Aug. 27 showed slower services growth than previously estimated and a drop in fixed investment.

Policy Response

Federal Reserve Chairman Ben S. Bernanke said on Aug. 27 that “strong and stable” growth will “require appropriate and effective responses from economic policy makers across a wide spectrum” as well as private-sector leaders.

European Central Bank officials will hold their next policy meeting on Sept. 2. The Financial Times reported today that the ECB is likely to extend emergency aid for the region’s banking industry into next year.

European governments from Italy to Spain have been forced to step up spending cuts to push down budget deficits and help restore investor confidence. Volkswagen AG, Europe’s largest carmaker, said on Aug. 16 that the austerity measures “will only allow for little economic growth.”

ECB President Jean-Claude Trichet said earlier this month, he said that the second half of 2010 will probably be “much less buoyant” than the three months through June, when the euro-area economy expanded 1 percent, the fastest in four years.

“We suspect things will get worse from here,” said Ken Wattret, chief euro-area economist at BNP Paribas. “Global economic conditions are beginning to cool down a little. The euro area generally is struggling.”

‘Protracted Recovery’

The commission’s gauge measuring manufacturers’ confidence in their export orders rose to minus 18 in August from minus 21 in July, today’s report showed. An index of overall order books rose to minus 19 from minus 21 and a gauge of employment expectations held at minus 6. Confidence in production expectations declined. Among services executives, a gauge of demand expectations for the next three months rose to 8, the highest in three months.

Unilever, the world’s second-largest consumer-goods maker, on Aug. 5 reported revenue growth that missed analysts’ estimates as sales slumped in Western Europe.

There will be a “long, slow, protracted recovery” in Europe, Chief Executive Officer Paul Polman said. “I cannot see Europe or the U.S. showing significant growth for the next five years at least.”

Recession Risk

Jacques Cailloux, chief European economist at Royal Bank of Scotland Group Plc, said in an interview with Bloomberg Television on Aug. 26 in London that risks of the euro-region economy slipping into another recession are increasing.

“I’m very concerned at this stage,” Cailloux said. “If we get a marked slowdown in key export markets, the European economy is extremely exposed to that.”

Still, ECB council member Axel Weber, who heads Germany’s Bundesbank, said in an interview with Bloomberg News on Aug. 19 that some fears are “a bit exaggerated.”

“It was clear to us always that the growth momentum would moderate both in emerging markets and the U.S.,” he said. “But let’s not exaggerate. We’re not facing major problems. The recovery is going to stay on track.”

Before it's here, it's on the Bloomberg Terminal. LEARN MORE