Euro-Area Economic Confidence Declined on Eve of Brexit Vote

  • Index falls to 104.4 as gauges for services, retailing worsen
  • Fallout from U.K. vote may weigh on sentiment in coming months

Euro-area economic confidence weakened in June in anticipation of a U.K. referendum that unexpectedly saw Britons choosing to leave the European Union.

An index of business and consumer sentiment fell to 104.4 from a revised 104.6 in May, the European Commission in Brussels said on Wednesday. Data were collected before the British vote on June 23. Economists surveyed by Bloomberg predicted the gauge would remain unchanged.

“Indicators about economic sentiment prior to Brexit seem like tales from a distant past as the economic environment has been disrupted heavily by uncertainty,” said Bert Colijn, senior euro-area economist at ING Bank NV in Amsterdam. “Still, this number should be interpreted as an indication of how well the euro-zone economy was performing going into this uncertain period.”

The U.K.’s shock decision to quit its membership in the 28-nation bloc triggered a market rout similar to the one observed during the 2008-2009 financial crisis and raised concerns that an already fragile euro-area recovery could be derailed. European Central Bank President Mario Draghi told European leaders on Tuesday that he leans toward more pessimistic forecasts of how much growth in the 19-nation region will suffer in the wake of Britain’s vote to leave.

“Ironically, some of the countries with larger shares of trade with Britain, like Belgium, Netherlands, Germany and Malta, saw marked improvements in sentiment in June,” Colijn said. Confidence in Europe’s largest economy jumped to the highest level since December, according to the report.

Strong Enough

German Chancellor Angela Merkel has said the EU remains one of the biggest economic global powers and is “strong enough” to withstand the U.K.’s exit. Economists have started to cut their growth forecasts for the euro area nonetheless, with Capital Economics warning this week that while the vote will have only a “small direct” impact on trade, “the indirect effects on confidence and financial markets may be more serious.”

Draghi said at an EU summit in Brussels that economic growth in the euro region could be as much as 0.5 percentage point weaker than previously estimated over the course of the next three years.

Clouding Outlook

That could once again cloud the outlook for inflation. Earlier this month, he expressed confidence that consumer-price growth would return to the ECB’s goal of just under 2 percent in the “not-too-distant” future, after more than three years of falling short. The ECB last increased stimulus in March, when it cut interest rates, presented a new long-term loan program and expanded asset purchases.

Euro-area consumer prices were unchanged from a year ago in June, Eurostat will say on Thursday, according to the median estimate in a separate Bloomberg survey. The ECB forecasts inflation will average 0.2 percent this year before accelerating to 1.3 percent in 2017 and 1.6 percent in 2018. It sees growth at 1.6 percent in 2016 and 1.7 percent in each of the following two years.

“The euro-zone economy was slowing before the U.K. voted to leave the EU,” Stephen Brown, European economist at Capital Economics in London, said in an e-mailed comment. “Further monetary easing is on the cards for the second half of 2016.”

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