Euro-Area Consumer Sentiment Drops as Ukraine Threatens Recovery

Euro-area consumer confidence declined in August as escalating political tensions in eastern Europe threaten the region’s already faltering economic recovery.

An index of household sentiment in the euro zone decreased to minus 10 from minus 8.4 in July, the European Commission in Brussels said in a preliminary report today. That is below the median forecast of minus 9.1 in a Bloomberg News survey of 22 economists.

Worsening consumer confidence is adding to signs that the euro-area’s economic outlook is deteriorating as tensions in Ukraine rise, increasing the likelihood that European Central Bank President Mario Draghi may have to deliver on a promise to add to unprecedented stimulus. The 18-nation economy stagnated in the second quarter and a report today showed that manufacturing and services activity slowed in August.

“Confidence has been undermined by the Ukraine situation as Italy reported a recession and the French economy stalled,” said James Shugg, senior economist at Westpac Banking Corp. in London. “That may have offset positives such as faster growth in Spain.”

Heineken NV, the world’s third-biggest brewer, yesterday signaled tougher times ahead for the beer industry. The Amsterdam-based company said it expects growth to moderate in the remainder of the year.

Downside Risks

“The risks are tilted to the downside,” said Natascha Gewaltig, director of European economics at Action Economics in London. “The tensions with Russia are turning into a trade war.”

The death toll is mounting in the conflict between Ukraine’s armed forces and pro-Russian separatists on the European Union’s eastern border. German Chancellor Angela Merkel will visit Ukraine on Aug. 23, while Russian President Vladimir Putin and Ukrainian President Petro Poroshenko may meet next week.

Gross domestic product in the euro area was unchanged in the second quarter, depressed by a bigger-than-forecast contraction in Germany, the region’s largest economy. The Bundesbank cautioned subsequently that a previously anticipated rebound in the second half is not a given.

While Spanish growth in the April-June period was the fastest since 2007, Italy fell into its third recession since 2008 and the French economy stagnated.

‘Dismal Failure’

Weakening growth in the region shows austerity policies to tackle the region’s debt crisis have been a “dismal failure,” Nobel laureate Joseph Stiglitz said in an interview yesterday. Inflation in the euro area slowed to 0.4 percent in July, the weakest pace in almost five years, and compares with the ECB’s goal of just under 2 percent. Unemployment fell to 11.5 percent in June from a record 12 percent last year.

Carrefour SA, France’s largest retailer, reported first-half profit last month that beat analysts’ estimates as sales strengthened in Europe. Meanwhile, European car sales rose 4.3 percent in June, the longest stretch of monthly delivery gains in four years.

“Geopolitical developments around the world may well delay or depress household-spending decisions,” said Timo del Carpio, an economist at RBC Capital Markets in London. “Looking forward, however, the conditions necessary for a rebound in sentiment in the second half of the year are falling into place.”

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