Weakening Sentiment in the Euro Area

July 28, 2008

Business and consumer confidence each tailed off further this past month.  July data will be released on Wednesday.  Overall economic sentiment in June fell to 94.9, lowest since August 2003, from 97.6 in May and 111.0 in July 2007.  Consumer confidence slid to -17 from -15 in May and -2 in July 2007, while industrial confidence stood at -5, three points below May’s -2 and ten points under its July 2007 level. Sharp declines in national business sentiment have been reported in Germany to 97.5 in July from 101.2 in June and 103.4 in May, France to 98 from 101 in June and 102 in May, Italy to 83.5 from 86.7 in June and 89.0 in May, and Belgium to -7.6 from -5.9 in June and -1.6 in May.  Italian consumer confidence fell 4.1 points to 95.8, and German consumer sentiment slid 1.5 points to 2.1.  Euroland’s flash composite PMI score in July slipped further below the 50 expansion-or-contraction line to 47.8 and had an even weaker forward-looking orders component of 46.4.  Both manufacturing (47.5) and services (48.3) had sub-50 values in July.  Weakness has spread to many of the common currency members, especially its larger economies.  Recessions in Spain and Italy seem unavoidable, and the two largest members, Germany and France, could experience recessions, too.  Export growth weakness will be exacerbated by euro strength. The trade-weighted euro has on average been worth 14.6% more this month than its mean value during the seven year to mid-2008.  Elevated inflation is squeezing consumption.  Germany’s most populous state of North Rhine Westphalia experienced a higher-than-expected 3.3% climb in consumer prices in the year to July, and German import prices advanced 8.9% in the year to June.  As in Japan (see previous post) or any economy for that matter, business spending is dependent on demand from either consumers or foreigners, and when both of these sources of demand struggling, capital spending also tends to sputter.  The surprise in Euroland is not that growth and confidence are weakening but rather at how sharply conditions are deteriorating.  Growth averaged 2.7% per annum over the ten quarters to 1Q08 but will likely be negative in 2Q08 and perhaps in 3Q08 as well.



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