European confidence in the economic outlook dropped more than economists forecast in November as the 17-nation euro region edged closer to a recession and the fiscal crisis started to hit larger countries.
An index of executive and consumer sentiment in the euro area fell to 93.7 from 94.8 in October, the European Commission in Brussels said today. That’s the lowest since November 2009. Economists forecast a drop to 93.9, the median of 31 estimates in a Bloomberg survey showed.
Euro-area finance chiefs meeting in Brussels today are under increasing pressure to step up their crisis response as the two-year sovereign debt crisis spreads from the periphery to core countries, clouding growth prospects. Services and manufacturing contracted in November and the European Central Bank this month unexpectedly trimmed borrowing costs.
Today’s numbers “support the message from other timely indicators that the euro zone is embarking on a deep recession,” said Jennifer McKeown, senior European economist at Capital Economics in London. “We now see gross domestic product falling by 1 percent next year and perhaps some 2.5 percent in 2013 as the debt crisis escalates and the currency union undergoes some form of break-up.”
The euro advanced after the report, trading at $1.3399 at 11:15 a.m. in Brussels, up 0.6 percent on the day. German 10-year government bonds pared gains, leaving the yield on the securities little changed at 2.30 percent.
Italy was again forced to pay above the 7 percent threshold that led Greece, Portugal and Ireland to seek bailouts when it sold 7.5 billion euros ($10.1 billion) in bonds today, short of the maximum target for the auction.
The Organization for Economic Cooperation and Development in Paris yesterday lowered its global growth forecast for this year and next, calling Europe’s fiscal crisis the main threat. The economy of the 34 OECD nations will expand 1.9 percent this year and 1.6 percent next instead of a previously projected 2.3 percent and 2.8 percent, respectively, it said.
The euro region is already in a “mild recession,” with gross domestic product rising just 0.2 percent in 2012, the OECD said. In 2013, the economy may expand 1.4 percent.
“The euro-area crisis represents the key risk to the world economy,” the OECD said. “Contagion has entered a new phase and spread beyond euro-area countries normally seen as fiscally vulnerable, suggesting that fiscal concerns are no longer the only driving force behind contagion.”
‘Moderate’ Sales Growth
A gauge of sentiment among European manufacturers dropped to minus 7.3 from minus 6.5 in October, today’s report showed. An indicator of services confidence fell to minus 1.7 from 0.1 in the previous month, while a measure of consumer confidence decreased to minus 20.4 from minus 19.9. A gauge of the business climate fell for a ninth month to minus 0.44 from minus 0.19.
Siemens AG, Europe’s largest engineering company, on Nov. 10 forecast that profit next year won’t advance on “moderate” sales growth. The Munich-based company joined rivals including France’s Schneider Electric SA in bracing for a slowdown in spending on infrastructure as cash-strapped governments toughen austerity measures to counter the fiscal crisis.
“We are currently seeing the first indications of a slowdown in demand in the European markets,” Juergen Geissinger, chief executive officer of Schaeffler AG, the roller-bearing maker that controls Continental AG, said on Nov. 22. “On a global basis, our orders in hand remain solid.”
European companies are already cutting spending and eliminating jobs. Euro-region unemployment unexpectedly increased in September, pushing the jobless rate to 10.2 percent. The euro region’s economic growth stalled in the third quarter from the previous three months; the economies of Portugal and the Netherlands shrank.
A gauge of euro-region manufacturers’ output expectations dropped to minus 0.7 from 0.2 in the previous month, today’s report showed. An indicator of order books slumped to minus 14, while a gauge of employment expectations declined to minus 3.
Fiat SpA CEO Sergio Marchionne said on Nov. 21 that the outlook for profitability in Europe is uncertain. The Turin, Italy-based carmaker is “to some degree cautious on what is possible from Europe next year,” he said.
Moody’s Investors Service said yesterday that the “rapid escalation” of the fiscal crisis threatens all of the region’s sovereign ratings. Credit risks will keep increasing without steps to stabilize markets in the short term, it said.
Spain last week dropped plans to sell three-year bonds, Standard & Poor’s trimmed Belgium’s credit rating and Portugal’s was cut by Fitch Ratings below investment grade.
Leaders are working toward a Dec. 9 summit meeting to regain investor confidence. Finance ministers meet today to thrash out details on how the region’s rescue fund, the European Financial Stability Facility, will boost its muscle by insuring sovereign debt with guarantees.
Still, Nobel Prize winner Joseph Stiglitz said on Nov. 23 that European efforts are “just too little and too late.”
“There’s a significant likelihood that Europe will be facing a recession, there are already signs of economic downturn,” he said. “European leaders say they’re committed to preserving the euro, but they’re reluctant to do what’s necessary.”
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. While the central bank has rejected calls to start printing money, it lowered the benchmark rate by 25 basis points to 1.25 percent, reversing two earlier increases this year.
Peter Vanden Houte, an economist at ING Group in Brussels, said the ECB is likely to “announce a stronger commitment” on bond purchases in return for a pledge from leaders at a December summit to boost fiscal integration and monitoring of budgetary policy.
“As a first step, we expect the ECB to lower interest rates again with 25 basis points at next week’s meeting, while also announcing longer-term funding operations for the banks,” he said. “After the European summit, the ECB might go a step further by announcing specific caps for bond yields.”
The ECB will hold its next monthly meeting on Dec. 8 and also publish its latest economic projections for 2012.