It News: Euro-Area Confidence Drops, German Jobless Increases: Economy

Euro-Area Confidence Drops, German Jobless Increases: Economy

Italy launched a new 10-year bond which sold at a yield of 5.82 per cent, the lowest since March.

Thursday, August 30, 2012
(Bloomberg) -- Economic confidence in the euro area fell more than economists forecast in August as leaders struggled to rein in the sovereign debt crisis and the region’s slump deepened.
An index of executive and consumer sentiment in the 17- nation euro area dropped to 86.1 from 87.9 in July, the European Commission in Brussels said today. That’s the lowest since August 2009. Economists had forecast a decline to 87.5, the median of 26 estimates in a Bloomberg News survey showed. In Germany, jobless claims rose for a fifth month in August.

European consumers and executives are growing more pessimistic about the outlook as officials try to contain the debt turmoil that’s showing little sign of abating. Spanish Prime Minister Mariano Rajoy meets with French President Francois Hollande today as he considers seeking a second European bailout.
“The economy might have contracted slightly more than previously forecast in the third quarter,” said Christoph Weil, an economist at Commerzbank AG in Frankfurt. “We still expect the economy to stabilize toward year-end but for that to happen, indicators would have to improve over the coming months. The problem is that the core of the euro area is weakening as well, pushing the economy deeper into recession.”

Downside Risks

The euro traded at $1.2542 as of 12:02 p.m. in London, up 0.1 percent on the day. It has depreciated 3.2 percent against the dollar this year after Spain and Cyprus were both forced to ask for external aid in June, joining Greece, Ireland and Portugal. The Stoxx Europe 600 Index dropped for a third straight day, declining 0.4 percent.
Moody’s Investors Service said today that downside risks to the global recovery this year and next have increased. Growth in 2012 will be “materially lower” than last year, with the euro region’s fiscal crisis posing the biggest risk to the outlook, the ratings company said.
Global leaders have also signaled concern about the turmoil. Chinese Premier Wen Jiabao told visiting German Chancellor Angela Merkel that Spain, Italy and Greece must take “comprehensive measures” to prevent a worsening of the region’s fiscal crisis.

Troika Report

Still, euro-area leaders have said they will await a report from Greece’s troika of creditors -- the European Central Bank, the European Commission and the International Monetary Fund -- before making a decision on whether to ease the terms of the country’s $240 billion lifeline. The ECB is also working out a plan to help support indebted nations by purchasing their bonds in tandem with the region’s rescue fund.
Still, governments may find it more difficult to plug their budget gaps without economic growth. The euro-area shrank 0.2 percent in the second quarter and indicators have since shown signs of a deepening slump. Services and manufacturing output shrank for a seventh month in August, Markit Economics in London said on Aug. 23.
Euro-region unemployment probably rose to a record 10.3 percent in July from 10.2 percent the previous month, according to a Bloomberg survey. The European Union’s statistics office will release the report tomorrow at 11 a.m. in Luxembourg.
Today’s confidence report showed that a gauge of sentiment among manufacturers fell to minus 15.3 in August from minus 15.1 in July. That’s the lowest since December 2009. Services confidence dropped to minus 10.8 from minus 8.5, while consumer sentiment slipped to minus 24.6 from minus 21.5, a three-year low. Sentiment in the construction industry also worsened.

German Slowdown

In Germany, Europe’s largest economy, which helped counter the euro area’s slowdown in the first half of the year, business confidence fell for a fourth straight month in August. The number of people out of work increased a seasonally adjusted 9,000 to 2.90 million in August, the Federal Labor Agency in Nuremberg said today. Economists forecast a gain of 7,000.

In a separate report, the VDMA machine-makers’ association said German plant and machinery orders declined for a ninth month in July as domestic demand slumped. Orders, adjusted for inflation, fell 2 percent from a year earlier after dropping an annual 1 percent in June.
Bayerische Motoren Werke AG, the world’s biggest maker of luxury cars, on Aug. 1 reported its first drop in quarterly operating profit in almost three years. Chief Executive Officer Norbert Reithofer said global conditions may “deteriorate in the face of the euro crisis and high government debt.”

Australia Housing

In Australia, a government report today underscored a slowdown in the nation’s housing market, with building approvals tumbling 17.3 percent in July from June, the most in almost a decade. A separate release showed that business investment rose 3.4 percent in the second quarter from the previous three months, less than half the prior gain.

The Philippines today reported that gross domestic product rose 5.9 percent in the second quarter from a year before, down from 6.3 percent in January-to-March. In Japan, retail sales fell more than economists forecast in July.
In the euro area, gauges on the outlook also weakened in August. A measure of manufacturers’ production expectations decreased to minus 8.6 from minus 7.7 in July, today’s report showed. An indicator of order books fell to minus 29.4 from minus 28.3, while an index of employment expectations also declined from the previous month.
“The sustained fiscal austerity and muddling through approach to the crisis is increasingly taking its toll on economic confidence across the region,” said Martin van Vliet, an economist at ING Group in Amsterdam.
ECB President Mario Draghi said on Aug. 2 that the central bank may intervene in bond markets to lower borrowing costs of Italy and Spain if those governments request aid from the European Stability Mechanism. Policy makers, who cut borrowing costs to 0.75 percent in July, will hold their next meeting on Sept. 6 in Frankfurt.

--With assistance from Kristian Siedenburg in Vienna, Michael Heath in Sydney and Joseph de Weck in Frankfurt. Editors: Fergal O’Brien, Jennifer M. Freedman