European Economic Confidence Unexpectedly Rose in August

(Bloomberg) --

Sentiment among euro-area businesses and consumers unexpectedly rose in August, respite from an almost non-stop string of disappointing numbers and recession concerns.

The European Commission’s index rose to 103.1 from 102.7, defying expectations for a decline. But the surprise move still only lifts the measure to a two-month high, and there have been false dawns before. A jump in May was more than wiped out over the following two months.

The increase may not be enough to shift European Central Bank policy makers from their path toward more stimulus, particularly after a month that saw Germany’s economy drift closer to a recession, a slump in manufacturing deepen, trade tensions escalate and the possibility of a no-deal Brexit rise.

German bonds fell, but 10-year yields remained well below zero, where they’ve been for months. European stocks are down more than 2% in August, after President Donald Trump escalated his China trade war at the start of the month.

The uptick in sentiment came from “markedly higher confidence” in industry and retail trade, the commission said, which outweighed a deterioration in services and construction. Managers in industry were more optimistic about production expectations and order books, a view somewhat out of line with pessimism seen in August’s Purchasing Managers Index.

Services Cracks

The decline in services confidence -- the third in a row -- is an unwelcome development. The sector has so far remained resilient in the face of an imploding manufacturing sector, beset by trade tensions and automotive woes.

That’s helped to support overall euro-area growth, and a continued downward trajectory would be a troubling sign of a deepening malaise.

Companies across the continent have expressed concern about the deteriorating global economic backdrop along and trade uncertainty. Henkel AG and Renault SA cut their forecasts in recent weeks.

A slowdown in German manufacturing, which is heavily reliant on foreign demand, has already put Europe’s largest economy on the brink of recession. The closely watched Ifo business expectations gauge has fallen every month bar one this year.

In the services sector, managers’ expectations for employment during the next three months fell noticeably. Signs of weakness in Germany’s robust labor market are already starting to show: the number of people out of work increased in August, data published Thursday show, although the unemployment rate remained near a record low 5%.

Exporters around Europe have felt the pinch of a slowing German economy, which could shrink by 0.2% in the third quarter, DIW economist institute said on Wednesday.

Spanish exporters, for instance, have seen weaker demand since the end of last year and they are worried about how the likely recession in Europe’s economic powerhouse will continue to drag on their sales.

Still, Antonio Bonet, head of a Spanish association of major exporters and investors, says the executives he represents are optimistic that Germany’s downturn will be a “small recession” rather than an economic upheaval.

--With assistance from Kristian Siedenburg and Harumi Ichikura.

To contact the reporter on this story: Jeannette Neumann in Madrid at jneumann25@bloomberg.net

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

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