Euro-Area Economic Confidence Extends Slide Into Third Month

(Bloomberg) -- Euro-area economic confidence continued its slide in March as the region showed signs of more moderate growth.

Optimism slipped in the region’s five biggest economies, taking the overall index to its lowest in six months. It’s a third straight drop from a 17-year high reached in December, and comes as a separate survey by UBS Group AG shows more companies expect to pare back investment as a result of Brexit.

The Commission report is the latest in a string of data suggesting economic growth in the currency bloc has cooled off after 2017 saw the fastest expansion in a decade. Purchasing Managers’ Indexes showed manufacturing and services activity in the euro area is growing at its slowest pace in 14 months, while investor confidence dropped amid mounting fears of a trade war.

Still, European Central Bank officials have expressed confidence in the region’s outlook. President Mario Draghi told European leaders that investment is rising to levels not seen in at least a decade, private sector debt is falling, and capital ratios of healthy banks are almost 50 percent higher than at the start of the crisis. The Frankfurt-based institution predicts economic growth will accelerate to 2.4 percent in 2018 from 2.3 percent last year.

At the same time, inflation has remained stubbornly below the goal of just under 2 percent, and Draghi has repeatedly insisted that an ample degree of monetary accommodation is still needed. Finland’s central-bank governor, Erkki Liikanen, said on Tuesday that exiting from unprecedented stimulus can be more safely done once expectations for consumer-price growth exceed that target.

Read more: Liikanen Cautions Against Tightening ECB Policy Too Soon

In contrast, Bundesbank President Jens Weidmann, a long-time critic of quantitative easing who is favorite to take the helm of the ECB next year, reiterated his view on Monday that the scaling back of stimulus should start soon. His Austrian counterpart Ewald Nowotny echoed those comments on Tuesday, saying the ECB should be able to “significantly reduce” QE after September.

The commission report showed that euro-area economic sentiment worsened in manufacturing, services and retail trade, while a gauge for construction increased. Consumer confidence was unchanged in March. In a separate report Tuesday, the ECB said loan growth to companies weakened in February.

According to the UBS survey on Tuesday, 39 percent out of executives polled said they expect to reduce investment as a result of Brexit, an increase from 35 percent in the third quarter of last year. Against that, companies are granting themselves more time to make the adjustment compared with the last poll, possibly in anticipation of a transition deal, according to UBS.

“Firms seem most concerned about uncertainty related to the future of the EU, the policies of the U.S. administration and Brexit,” said the report’s authors, led by UBS chief European economist Reinhard Cluse. “Concern over the political situation in Spain and Germany has risen. But surprisingly, the political climate in Italy seems to be only of moderate concern.”

©2018 Bloomberg L.P.