European confidence in the economic outlook unexpectedly worsened in February after the euro region’s recovery almost stalled in the fourth quarter.
An index of executive and consumer sentiment in the 16 nations using the euro slipped to 95.9 from a revised 96 in January, the European Commission in Brussels said today. The economic recovery may fail to gather strength for most of 2010, the commission said in a separate report.
European domestic demand remains weak and it’s not yet clear to what extent the euro region will benefit from a global recovery, the commission said. As governments seek to bolster the recovery, they also are trying to stem investor concern about widening budget deficits in Greece and other nations, which is pushing up bond yields.
“There are still some dark clouds in the air,” European Union Economic and Monetary Affairs Commissioner Olli Rehn said today at a press conference in Brussels. “Clearly, turning the European economy back on a strong and sustainable path is now our overriding objective.”
The February drop in the confidence index was the first in 11 months. Economists had projected an increase to 96.4 from a previously reported January reading of 95.7, according to the median of 25 forecasts in a Bloomberg News survey.
The euro declined against the dollar and was at $1.3489 as of 1:12 p.m. in London, down 0.4 percent. The yield on the German 10-year bond fell 2 basis points to 3.11 percent.
Cautious Outlook
The German economy, Europe’s largest, may fail to grow in the three months through March before expanding 0.3 percent in the following two quarters, the commission forecast. France may grow 0.4 percent in the first quarter and stall in the second. The U.K., which isn’t part of the euro area, is seen expanding 0.2 percent in both quarters.
The commission sees the euro-area economy expanding 0.7 percent this year after a 4 percent contraction in 2009, unchanged from its previous forecast in November. In the fourth quarter, the economy expanded just 0.1 percent.
Carrefour SA doesn’t “see any change in the European environment for the next six months at least,” Chief Executive Officer Lars Olofsson said on Feb. 19, after Europe’s largest retailer reported a 70 percent drop in full-year profit.
Separate data today showed that loans to households and companies in Europe declined in January from a year earlier after the economic expansion curbed demand for credit. German unemployment increased for a second month in February.
Deficit Woes
Concern about Greece’s ability to finance its deficit and debt has roiled financial markets since the government revealed it had a budget gap of 12 guaranteed approval cash loans.7 percent of GDP last year. That’s more than four times the limit allowed for countries using the euro and the highest in the 27-nation EU.
Standard & Poor’s said late yesterday that it may lower its BBB+ rating on Greece by the end of March and Moody’s Investors Service said today that it may reduce its A2 grade in a few months.
The commission said its deficit forecasts remain “broadly unchanged” from its November assessment, when it projected the region’s average budget gap would widen to 6.9 percent of GDP in 2010. All euro-area nations will breach EU deficit limits this year and next, the commission forecast.
It also said there’s a possibility that the impact of sliding sovereign bonds could be “broader, weighing further on the recovery” by pushing up financing costs.
Euro-Area Inflation
Euro-area inflation may accelerate to 0.8 percent in the current quarter and 1.3 percent in the second quarter, according to the commission. For the full year, the commission sees inflation averaging 1.1 percent, compared with 0.3 percent in 2009. In the confidence report, a gauge of consumers’ price expectations over the next 12 months rose to the highest since March 2009.
The European Central Bank, which aims to keep inflation just below 2 percent, earlier this month kept borrowing costs at a record low of 1 percent. The Frankfurt-based central bank will decide next month on a further “gradual” phasing-out of emergency measures introduced to fight the economic crisis, ECB council member George Provopoulos said.
“It’s premature to talk about a self-sustaining, jobs- creating recovery,” said Martin Van Vliet, an economist at ING Group in Amsterdam. The confidence data “highlight the need for the ECB to tread carefully in unwinding unconventional stimulus and to keep interest rates firmly on hold for the time being.”
Companies across Europe are already seeking ways to expand in faster-growing economies to help boost sales. Paris-based Pernod Ricard SA, the world’s second-largest liquor maker, said on Feb. 18 that sales from China will shortly overtake those in Spain, and emerging markets such as Russia are “starting to turn around.”
“The question is how robust the global cycle will prove to be and how much EU economies will benefit from it,” the commission said. “A rather cautious export outlook is therefore warranted.”
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