Euro-Area October Economic Sentiment Falls to Three-Year Low

Economic confidence in the euro area fell for an eighth month to the lowest in more than three years in October, adding to signs the slump extended into the fourth quarter.

An index of executive and consumer sentiment in the 17-nation euro area dropped to 84.5 from 85.2 in September, the European Commission in Brussels said today. That’s the lowest since August 2009. Economists had forecast a decrease to 84.4, the median of 27 estimates in a Bloomberg News survey showed.

Europe’s economy probably continued to shrink in the third quarter following a contraction of 0.2 percent in the previous three months, putting it into its first recession since 2009. With austerity measures across the euro area undermining consumer and business confidence and unemployment at a record, the European Central Bank last month cut its 2013 euro-region growth projection. German unemployment rose twice as much as economists forecast in October, a report showed today.

“October’s decline in euro-zone economic sentiment reinforces concern that the economic downturn in the region may be deepening and widening,” said Martin van Vliet, an economist at ING Groep NV in Amsterdam. “The sustained fiscal austerity, slowdown in global growth and the lack of decisive action to resolve the crisis continue to take their toll.”

German Unemployment

The euro has gained about 3 percent against the dollar over the past two months after European leaders stepped up their crisis response and the ECB pledged to purchase bonds of distressed nations if they ask for external aid first. The European currency traded at $1.2953 at 11:36 a.m. in Brussels, up 0.4 percent on the day.

Governments may struggle to meet their budget targets with at least five euro-area economies in a recession and others cooling. Euro-area services and manufacturing output contracted and unemployment held at 11.4 percent in August, the highest since the data series began in 1995.

In Germany, Europe’s largest economy, the number of people out of work rose a seasonally adjusted 20,000 from September to 2.94 million, the Federal Labor Agency in Nuremberg said today. Economists had forecast a gain of 10,000, the median of 31 estimates in a Bloomberg survey showed. The adjusted jobless rate held at 6.9 percent.

‘Tougher’ Environment

A gauge of sentiment among European manufacturers fell to minus 18 from minus 15.9 in September, today’s report showed. An indicator of services confidence dropped to minus 12.1 from minus 11.9, while a gauge of consumer sentiment rose to minus 25.7 from minus 25.9. Sentiment in the construction industry also fell from the previous month.

Volkswagen AG, Europe’s largest carmaker based in Wolfsburg, Germany, last week reported a drop in nine-month operating profit as demand weakened. German sporting-goods maker Puma SE said earlier this month it plans more cost cuts and LVMH Moet Hennessy Louis Vuitton SA, the world’s biggest luxury-goods maker, has called the environment “tougher.”

“Every indicator we’re looking at is headed south for Europe,” Carl Weinberg, chief economist at High Frequency Economics in Valhalla, New York, told Kathleen Hays on Bloomberg Radio on Oct. 24. “Europe is headed for an event much more akin to the Great Depression than to any other business cycle we’ve seen in our lives.”

Capacity Utilization

A gauge of euro-zone manufacturers’ production expectations decreased to minus 11 from minus 10.2 in September, today’s report showed. An indicator of order books fell to minus 34.9 from minus 30.5, while an index of employment expectations also declined from the previous month.

An indicator of capacity utilization in the manufacturing industry was at 76.8 percent, down from 77.9 percent in the previous quarterly survey. Data are collected in January, April, July and October. A separate indicator put the number of months production was considered assured by orders on hand at 3.1, unchanged from the previous quarterly survey. That’s down from 3.3 a year earlier.

The ECB said in its quarterly projections on Sept. 6 that the euro-area economy may expand 0.5 percent next year, half the pace projected in June. The International Monetary Fund last month cut its 2013 growth forecast to 0.2 percent from 0.7 percent. Both institutions see an economic contraction this year.

ECB Plan

The Frankfurt-based central bank has trimmed borrowing costs to a record and flooded the banking system with more than 1 trillion euros ($1.3 trillion) of cheap cash to fend off a credit squeeze. ECB President Mario Draghi last month unveiled details of the unlimited bond program to counter the turmoil.

Still, Kit Juckes, head of foreign-exchange research at Societe Generale SA in London, said part of the economic woes lie with the region’s banks. While they “are able to live on with bloated balance sheets, with loans that they can finance with the help of cheap money from the ECB,” they remain unable to sell shares or “make themselves healthier,” he said.

“They can’t get loans out into the economy to get growth, so we have no growth and rising taxes and cuts in public spending,” he told Tom Keene on Bloomberg Radio’s “Bloomberg Surveillance” on Oct. 24. “That’s a desperately disappointing outcome.”

(Updates with comment from economist in fourth paragraph. For more on Europe’s debt crisis, click on TOP CRIS.)
    Before it's here, it's on the Bloomberg Terminal. LEARN MORE