Economic sentiment drops to 34-month low in eurozone

30 July 2012 | By Gary Jackson

Eurozone economic sentiment has fallen to a 34-month low amid a backdrop of the region’s continuing debt crisis and weakening economic numbers.

The European Commission’s economic sentiment indicator for July dropped by two points to 87.9. This is the fourth month running that the ESI has declined and was driven by weakness in all business sectors and consumer confidence.

Manufacturing experienced the sharpest drop in confidence in July, but declines were also posted in the services, retail and construction sectors. Employment expectations are weak in all sectors, especially manufacturing.

Consumer confidence also dropped to a 35-month low in the eurozone as worries persist about jobs and the wider economic outlook. Consumers’ willingness to make major purchases now and in the coming year also weakened, adding to concerns about future spending.

The disappointing indicator comes as the Markit eurozone retail purchasing managers’ index shows sales fell for the ninth month in a row during July as conditions deteriorated in France and Italy. Germany was able to post sales growth, but only at a marginal rate.

Germany witnessed the sharpest fall of the month in the ESI, dropping by 3.7 points, while France eased 2.3 points and Spain decreased 1.4 points. A 1.3-point increase was recorded in Italy and the Netherlands gained 0.6 points.

IHS Global Insight chief UK and European economist Howard Archer says: “The further decline in economic sentiment is yet another blow to eurozone growth hopes, especially as it follows on from the purchasing managers’ surveys indicating ongoing appreciable contraction in services and manufacturing activity in July.”

Archer adds the fall in ESI makes it likely that eurozone GDP will have contracted for a third quarter running and reinforces the argument that the European Central Bank will cut interest rates to a new record low later in the year.

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