European Economic Confidence Drops, Inflation Eases
Europeans' confidence in the economic outlook fell more than economists forecast this month as the economy teetered on the brink of a recession. Inflation unexpectedly slowed.
An index of executive and consumer sentiment dropped to 88.8 from 89.5 in July, the European Commission in Brussels said today. That is below the 89.3 median estimate of 26 economists surveyed by Bloomberg News. Inflation fell to 3.8 percent from 4 percent last month and consumers' outlook on prices plunged.
The euro pared gains after the reports, which signaled the slump in economic growth is extending through the third quarter and a 20 percent drop in oil prices from a record $147.27 a barrel last month is easing inflation pressures. Consumer-price increases are still above the European Central Bank's limit, prompting policy makers including Axel Weber to indicate they are in no hurry to cut interest rates even as expansion slows.
“The euro-zone economic situation is deteriorating markedly,'' said Carsten Brzeski, an economist at ING Group in Brussels. “Therefore, it is somewhat striking that some central bankers still consider interest rates to be accommodative.''
Economists had forecast that inflation would remain at 4 percent, a 16-year high, in August, according to the median estimate of 31 economists in a Bloomberg News survey. National data this week showed inflation in Germany, Europe's largest economy, Spain and Belgium eased this month.
European Bonds
The euro was up 0.2 percent to $1.4731 against the dollar as of 10:12 a.m. in London, having been as high as $1.4767 earlier. European bonds extended gains, with the yield on the German 1-year bund falling 4 basis points to 4.14 percent today. It's down 21 basis points since the start of the month cash advance.
The ECB, which aims to keep inflation just below 2 percent, raised its key interest rate to 4.25 percent on July 3, a seven- year high. While the central bank left the rate on hold this month, ECB Executive Board member Lorenzo Bini Smaghi said in a Bloomberg Television interview broadcast today that inflation is “too high'' and must be brought below the bank's ceiling.
Still, most investors have pared bets on the ECB raising rates again as the economic outlook worsens, Eonia forward contracts show. The May contract yielded 4.15 percent today, down from 4.44 percent a month ago.
The 15-nation euro-area economy shrank in the second quarter while the region's manufacturing and service industries contracted in August. Factory orders in Germany have dropped for the past seven months.
Consumer Confidence
Confidence among euro-area manufacturers fell more than economists forecast to minus 10 this month from minus 8 in July, while sentiment among retailers also declined, according to today's report from the commission. Consumer confidence rose 1 point from July's minus 20, staying close to a 5 1/2-year low. In the U.K., consumer confidence stayed near a record low in August, GfK NOP said today in a separate report.
In the euro area, unemployment remained at 7.3 percent in July, another report showed.
European companies and consumers see less chance of prices rising, the data indicate. A measure of companies' selling-price expectations fell to 17 in August from 20 in July. Consumers' outlook for prices dropped to 22 from 30, below its average reading for the past 18 years.