Economic confidence in the euro area fell more than economists forecast to the lowest in almost three years in July, suggesting the economy’s slump extended into the third quarter as governments struggled to tame the debt crisis.
An index of executive and consumer sentiment in 17-nation euro area dropped to 87.9 from 89.9 in June, the European Commission in Brussels said today. That’s the lowest since September 2009. Economists had forecast a drop to 88.9, the median of 26 estimates in a Bloomberg News survey showed.
European governments are striving to contain the debt turmoil, which has undermined confidence and last month forced Spain and Cyprus to seek external aid. European Central Bank President Mario Draghi, who will meet with U.S. Treasury Secretary Timothy Geithner in Frankfurt today, said last week that policy makers will do whatever is needed to preserve the euro.
“It appears that the euro zone is headed for further clear gross-domestic-product contraction in the third quarter,” said Howard Archer, chief European economist at IHS Global Insight, who estimates the second-quarter contraction at 0.3 percent. The weakness “piles yet more pressure on the ECB to come up with concrete measures at its policy meeting” on Aug. 2.
The euro has depreciated 7.4 percent against the dollar over the past three months as Spain in June asked for as much as 100 billion euros ($123 billion) of bailout loans for its banks. The European currency is down 0.5 percent against the dollar today, trading at $1.2277 at 12:05 p.m. in Brussels.
Moody’s Investors Service on July 23 cut the outlook on Germany’s Aaa credit rating to negative and said there is a risk that Greece could leave the euro and an “increasing likelihood” countries such as Spain and Italy will require aid.
“There are an awful lot of bumps in the road before we get home,” John Taylor, chairman of FX Concepts LLC, told Sara Eisen on Bloomberg Television’s “Money Moves” on July 27 in New York. “I’m a little nervous that something might happen. It’s a pull-your-hair-out market.”
With governments seeking ways to plug their budget deficits, the economy is edging toward its second recession in four years, defined by two quarters of economic contraction. German business confidence fell more than economists forecast in July to the lowest in more than two years and euro-area services and manufacturing output contracted this month.
The International Monetary Fund on July 16 cut its euro-area growth forecast for next year to 0.7 percent from 0.9 percent and said GDP will drop 0.3 percent in 2012. It also cut its global growth forecast for 2013.
BASF SE, the world’s largest chemical maker, said on July 26 that it doesn’t expect demand to pick up in the current half. Siemens AG, Europe’s biggest engineering company, said on the same day that reaching its full-year earnings goal has become more difficult after reporting first-quarter earnings that fell short of analysts’ estimates.
“We see clearly all the macro indicators pointing south, a slower environment also in Europe -- the situation is more difficult,” Siemens Chief Executive Officer Peter Loescher told Linzie Janis on Bloomberg Television’s “Countdown” last week. “We anticipate that we will continue to have a volatile environment, a recessionary environment.”
A gauge of sentiment among European manufacturers fell to minus 15 from minus 12.8 in June, the report showed. An indicator of services confidence dropped to minus 8.5 from minus 7.4, while a gauge of consumer sentiment slipped to minus 21.5 from minus 19.8. Sentiment in the construction industry also worsened from June.
Daimler AG, the world’s third-largest maker of luxury vehicles, on July 25 reported a 13 percent drop in second-quarter profit, with CEO Dieter Zetsche saying “economic uncertainty and risks exist in nearly all regions.” PSA Peugeot Citroen, Europe’s No. 2 carmaker, which is cutting some 8,000 jobs, said the same day that first-half profit fell.
“The depth and persistence of the crisis impacting our business in Europe requires the launch of the reorganization of our French production base and a reduction of our structural costs,” Peugeot CEO Philippe Varin said. “We have a clear understanding of how hard this project is for a large number of our employees.”
A gauge of euro-zone manufacturers’ production expectations dropped to minus 7.6 from minus 5.6 in June, today’s report showed. An indicator of export order books fell to minus 26.6 from minus 22.5, while an index of employment expectations also declined from the previous month.
Economic data in Asia today also showed weakness in the manufacturing industry. Japan’s industrial output unexpectedly declined and South Korean manufacturers’ confidence dropped to a three-year low, reports showed.
South Korean Finance Minister Bahk Jae Wan said the economy is in a “difficult” situation. “I will do everything I can to find a solution for the sluggish domestic economy,” Bahk said today in a speech to government officials in Gwacheon.
In Europe, the ECB will probably keep its benchmark interest rate at 0.75 percent when council members meet on Aug. 2, according to a Bloomberg survey. The Frankfurt-based central bank last month reduced borrowing costs to a record low.
Draghi said on July 26 that policy makers are ready “to do whatever it takes to preserve the euro,” adding that “believe me, it will be enough.” The U.S. Federal Reserve and the Bank of England also meet this week to consider stimulus.
“The ECB is going to find itself under increased pressure over the summer period,” Simon Smith, chief economist at FXPro Financial Services Ltd. in London, said in an e-mailed note before today’s release. “Even though rates may be near zero, they are still seen having the greatest power to elicit some confidence in markets.”