Euro-Area Economic Confidence Drops as Brexit Shock Sinks In

Negative Shock in the Aftermath of the Brexit Decision
  • August fall in sentiment follows unexpected increase in July
  • Survey may help guide debate at next ECB policy meeting

Euro-area economic confidence worsened more than analysts predicted in August in a sign that the reverberations of Britain’s decision to leave the European Union may finally be reaching companies and households.

An index of industry and consumer confidence fell to 103.5 from a revised 104.5, the European Commission in Brussels said on Tuesday. That compares with a median estimate of 104.1 in a Bloomberg survey of economists, and follows an unexpected increase in July.

With European Central Bank President Mario Draghi leaving it largely to economic data to fine-tune policy expectations before next week’s Governing Council meeting, the release provides a case for more stimulus to sustain the recovery and revive inflation. The International Monetary Fund has already cut its forecast for euro-area growth next year on the back of the U.K.’s Brexit vote, and the ECB will release new projections next week.

“The weakness in the August reading is broad-based across all countries, with some exceptions, and across sectors,” said Frederik Ducrozet, an economist at Banque Pictet & Cie SA in Geneva. “It’s another reason to be cautious and dovish for the ECB. Maybe not in the next weeks, but in the next months.”

August Weakness

Inflation in the currency bloc probably accelerated to 0.3 percent in August from 0.2 percent the month before, leaving it well below the ECB’s goal of just under 2 percent, according to a separate survey. Eurostat will release preliminary figures on Wednesday, along with jobless data that is expected to show the unemployment rate dropped to 10 percent in July.

Sentiment in the industrial sector fell to minus 4.4 from minus 2.6, the lowest level in 18 months, according to Commission data. Confidence also slipped in services, retailing and among consumers, while a gauge for construction rose to an 8-year high.

Figures showed last week that confidence also subsided in the region’s two largest economies. Germany’s business climate as measured by Munich-based research institute Ifo unexpectedly declined the most in more than four years. Sentiment slipped in France, the nation’s statistics institute said.

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