European Economic Confidence Worsened in May on Debt Crisis

European confidence in the economic outlook weakened for a third straight month in May as the region’s worsening debt crisis and surging commodity costs clouded growth prospects.

An index of executive and consumer sentiment in the 17-member euro region slipped to 105.5 from 106.1 in April, the European Commission in Brussels said today. Economists had forecast a drop to 105.7, the median of 27 estimates in a Bloomberg survey showed.

The euro-area economy is showing signs of a slowdown as governments toughen austerity measures to lower budget gaps as investors grow increasingly concerned that Greece may default, while oil-driven inflation squeezes household incomes. European manufacturing growth slowed this month and money supply expanded at a weaker pace in April, easing pressure on the European Central Bank to raise borrowing costs further.

“Greek restructuring fears, high oil prices, fiscal tightening and slower external demand are damping the economic mood,” said Martin van Vliet, an economist at ING Group in Amsterdam. “The ECB is likely to stay in a gradual tightening mood.”

The euro declined after the data were released, dipping to $1.4199 at 11:00 a.m. in Brussels before rebounding to $1.4215, up 0.5 percent.

‘Major Risk’

A gauge of sentiment among euro-region manufacturers fell to 3.9 in May from 5.6 in the previous month, today’s report showed. An indicator of services confidence slipped to 9.2 from 10.4, while a measure of consumer confidence rose to minus 9.8 from minus 11.6 in April. Sentiment among builders and retailers also worsened this month.

Euro-region growth may lag behind an expansion in the U.S. this year, the Organization for Economic Cooperation and Development said on May 25, when calling the debt crisis a “major risk” to the outlook. In the currency union, gross domestic product may rise 2 percent this year, while U.S. GDP is seen increasing 2.6 percent. Japan may contract in 2011, the Paris-based group said.

“The pace of recovery is likely to be dampened by required fiscal consolidation” as well as rising energy costs, the OECD said. “Risks around the pace of the recovery in domestic demand remain substantial but broadly balanced.”

European governments are seeking ways to fight the debt crisis from spreading as investors grow increasingly concerned that Greece won’t be able to repay its debt after last year’s 110 billion-euro ($157 billion) bailout. Andrew Bosomworth, a fund manager at Pacific Investment Management Co., said on May 25 that a default “might be inevitable.”

‘Growth Moderation’

“So far, the tensions in the periphery didn’t have implications for the growth performance of the region’s core countries,” said Silvio Peruzzo, an economist at Royal Bank of Scotland Plc in London. Still, “we expect to see some growth moderation starting from the second quarter.”

Euro-growth is cooling after the economy expanded 0.8 percent in the first quarter. European manufacturing and services growth weakened in May, French business confidence fell and German executives grew less pessimistic about the outlook. M3 growth, which the ECB uses as a gauge for future inflation, slowed to 2 percent in April from 2.3 percent in March, central bank data showed today.

The German economy, Europe’s largest, may continue to drive the region’s expansion this year as companies step up output and hiring to meet export demand, encouraging consumer spending. The European Commission on May 13 forecast German GDP to rise 2.6 percent this year after increasing a record 3.6 percent in 2010.

‘Good Start’

Schaeffler Group, the roller-bearing maker that owns 60 percent of Continental AG, on May 17 reported a return to profit in the first quarter and Chief Executive Officer Juergen Geissinger said that “following a good start to 2011, we are looking forward to the remainder of the year with confidence.”

An indicator of manufacturers’ order books slipped to minus 2.5 in May from 0.1 in the previous month, today’s report showed. An indicator of employment expectations fell to 6.3 from 7.3 and a gauge measuring the assessment of the development in selling prices dropped to 19.8 from 21.3.

With governments toughening austerity measures and the recovery faltering, companies may struggle to pass on higher costs. Crude oil prices have increased 35 percent over the past year, pushing euro-region inflation to 2.8 percent in April.

A gauge measuring households’ confidence in their ability to save money over the coming year rose to minus 7.4 from minus 8.1 in April. An indicator of expectations in unemployment dropped to 13.7 from 16.6 and a gauge of price developments over the coming 12 months fell to 27.4 from 30.7. Consumers also were less willing to purchase big-ticket items over the coming year, according to the report.

‘Uncertain’ Outlook

Hermes International SCA, the Paris-based maker of Birkin handbags, said on May 11 that the forecast for 2011 is “clouded by geopolitical and economic uncertainties.”

The ECB, which aims to keep annual gains in consumer prices just below 2 percent, last month raised borrowing costs for the first time in almost three years to fight price pressures. While President Jean-Claude Trichet has signalled the central bank may keep the benchmark rate at 1.25 percent next month, he said yesterday that policy makers are “carefully monitoring” developments and will “do whatever is necessary.”

“The ECB is clearly looking to ram home the message that it will be tough on inflation, despite the uncertain growth outlook and the problem facing the southern euro-zone periphery countries and Ireland,” said Howard Archer, chief European economist at IHS Global Insight in London. “July remains the most likely choice for the next ECB interest rate hike.”

The Frankfurt-based ECB will hold its next policy meeting on June 9.

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