Euro-Area Confidence Slides in Sign Worse Might Still Be Ahead

(Bloomberg) --

Economic confidence in the euro area extended its slide this month, lending credence to warnings by the European Central Bank that the region might not have seen the worst of its downturn.

With an industry slump proving persisting, consumers are their most gloomy on the economy in six years and more reluctant to spend, a development that would deal another blow to growth. The euro-area economy is already faltering, and forecast to have barely expanded in the third quarter.

Sentiment deteriorated across all sectors apart from construction in October. Manufacturers were more pessimistic on production expectations, services providers were wary of future demand, and consumers’ doubts about the state of the economy weighed on retailers’ sales outlook.

The European Commission survey is the latest in a string of disappointing reports about the euro-area economy that arrived after the ECB unleashed a fresh dose of monetary stimulus in September. That proved a controversial move by outgoing President Mario Draghi, who justified it by arguing that persistent trade threats and geopolitical uncertainty were starting to leave more serious damage on domestic demand.

What Bloomberg’s Economists Say

“Weakness in manufacturing is likely to have spread to services, prolonging the slowdown. Leading indicators are consistent with growth remaining slow at least until early 2020, but don’t signal a deep downturn.”

--Read the EURO-AREA PREVIEW

The 19-nation economy probably expanded only 0.1% in the third quarter, which would be the weakest performance in over six years. Germany, the largest economy in the bloc, is widely expected to have slipped into a technical recession.

One piece of reassuring news came from France. The euro area’s second-largest economy expanded more than expected, a sign it’s avoiding some of the global manufacturing malaise that’s engulfed parts of the rest of the region.

The country is less exposed to trade difficulties and more reliant on domestic demand, which the government has spurred with tax cuts. Household spending and business investment accelerated in response.

“Government handouts to households can provide an effective and welcome boost to the economy in the face of external shocks,” said Maeva Cousin, a euro-area economist at Bloomberg Economics. “After banking most of the fiscal giveaways in the first half, French consumers opened their wallets, with car purchases in particular helping to offset the deterioration in net trade.”

Draghi has long called on countries with room for maneuver to raise fiscal spending, and used his last speech to urge governments to make a more coordinated effort to raise growth momentum in the euro area.

His successor Christine Lagarde has signaled she’ll continue the push. In an interview with French radio RTL, she said Wednesday that growth globally is “precarious” and “fragile,” and countries with fiscal space “haven’t really made the necessary efforts.”

“We are of course thinking of countries that have chronic budget surpluses like the Netherlands and Germany and a few others in the world,” she said. “Why not use this fiscal surplus and invest in infrastructure. Why not invest in education, in innovation to have a better re-balancing in the face of current imbalances.”

--With assistance from Barbara Sladkowska, Kristian Siedenburg and Harumi Ichikura.

To contact the reporters on this story: Jana Randow in Frankfurt at jrandow@bloomberg.net;William Horobin in Paris at whorobin@bloomberg.net

To contact the editors responsible for this story: Fergal O'Brien at fobrien@bloomberg.net, Zoe Schneeweiss

©2019 Bloomberg L.P.