European confidence in the economic outlook in August plunged the most since December 2008 as a persistent debt crisis roiled markets and clouded growth prospects across the 17-country euro region.
An index of executive and consumer sentiment in the single currency region fell to 98.3 from a revised 103 in July, the European Commission in Brussels said today. That's the lowest since May 2010.
The euro area's economic prospects are deteriorating as national governments cut spending in a bid to narrow deficits and tackle the debt crisis. Economic and monetary affairs commissioner Olli Rehn signalled yesterday that the EU may reduce its 2011 growth forecast from 1.6 per cent on concerns that financial turbulence could spill into the broader economy.
"The risk of recession in the euro area has clearly increased as demand from Asia is flagging and governments' efforts to cut fiscal deficits are curbing domestic consumption," said Daniel Hartmann, an economist at Switzerland-based Bantleon Bank. "I expect the indicator to decline further in the coming months."
A gauge of sentiment among European manufacturers dropped to minus 2.9 from 0.9 in the previous month, today's report showed. An indicator of services confidence fell to 3.7 from 7.9, while a measure of consumer confidence declined to minus 16.5 from minus 11.2.
European leaders have struggled to contain a debt crisis that originated in Greece and has forced Ireland and Portugal to seek bailouts as well. The European Central Bank began buying Spanish and Italian government bonds on August 8th to stop the debt crisis from spreading to the euro-region's third- and fourth- biggest economies. The purchases brought the countries' 10-year bond yields down to about 5 per cent from euro-era records, even as Europe's leaders disagreed over how to contain the turmoil. '
ECB president Jean-Claude Trichet said yesterday that the Frankfurt-based central bank is reviewing its assessment of inflation risks on slower growth in the euro area. The region's growth slowed to 0.2 per cent in the second quarter, its worst showing since emerging from recession in 2009.
Slowing growth may prompt the ECB to refrain from increasing borrowing costs further after it raised its benchmark rate twice this year. The bank will hold its next rate meeting on September 8th.
"Looking ahead, we continue to see the euro-area economy growing at a modest pace in a context of overall relatively sound economic fundamentals for the euro area as a whole," Mr Trichet said. "At the same time, not least because of the recently re-emerged tensions in financial markets, uncertainty remains particularly high."
Although confidence in industry remained above the long- term average, it declined in August "on the back of a drop in managers' appraisal of the level of order books and production expectations", according to today's EU report. These indicators slumped to minus 9.1 from minus 4.7 and to 5.6 from 9.8, respectively.
Manufacturing executives were also more pessimistic about their export order books, with the confidence gauge dipping to minus 9.4 from minus 4.4, the commission said.
Bloomberg
