There is ‘Gloom & Doom’ in the Eurozone Business Sector
While the Eurozone economy has proved resilient to multiple uncertainties such as Brexit, Key business surveys in Europe’s 2 biggest economies, Germany and France has poured a bucket of cold water on the rising optimism.
The Ifo Business Climate Index, which is a highly-regarded early indicator of economic developments in Germany published on a monthly basis, fell from 108.3 points in July to 106.2 points in August, the Ifo Institute said Thursday.
Business confidence in Germany has clearly worsened, said Clemens Fuest, President of the Ifo Institute.
“Both the current business situation, and the expectations for the next six months, were assessed more poorly by the companies than in the previous month. The German economy has fallen into a summer slump,” Fuest said in a statement.
“The IFO survey in Germany was a nasty downside surprise for markets,” Claus Vistesen, chief Eurozone economist of Pantheon Macroeconomics said, noting that the business climate index was well below the consensus forecast of a modest rise.
In addition, the expectations index slid to 100.1 in Germany, from a revised 102.1 in July.
“We start to worry when this gauge flirts with a dip below 100; it has historically been a reliable indicator of a business cycle downturn in Germany,” Mr. Vistesen said.
Pantheon Macroeconomics predicted German GDP growth to slow down in coming Quarters, after a very strong 1-H.
Brexit uncertainty is partly to blame for the poor IFO showing, but domestic retail sentiment also plunged, the economist said.
The media predictably cited the dip in headlines, saying it was a sign that uncertainty over the British referendum result had hit continental Europe (Eurozone).
“This is plausible given the importance of UK demand for German goods in pushing the trade surplus higher in this cycle,” Mr. Vistesen said.
Growth in nominal German exports to Britain was already slowing sharply ahead of the Brexit referendum. Even worse, Pantheon’s short-term assessment of the British economy indicated that German exports across the English Channel would slow further in Q-3.
Brexit uncertainty was only part of the story in the weak IFO survey, said Mr. Vistesen, adding that plunging sentiment in the retail industry was also a major driving force.
According to surveys, retail confidence in Germany slipped to a 32-month low, and growth in consumer goods spending was slowing.
However, the surveys noted that sentiment in the construction industry was stable in August, the economist estimated the capital expenditure (CAPEX) in the building sector, which is almost 50% of total investment, will support German capital formation in the following Quarter.
French business sentiment also stumbled in August.
The headline manufacturing confidence index fell to 101 in August, from 103 in July, and the overall business confidence gauge fell marginally to 101 from 102 last month, according to the monthly business survey released Thursday by the National Institute of Statistics and Economic Studies (INSEE).
“The turning-point indicator is now in the zone indicating an unfavourable economic outlook,” INSEE has said.
Market analysis said French sentiment was hit by a sharp fall in the food and beverage manufacturing sector, and modest declines in the transport and equipment sector.
“The headline manufacturing index remains above its long-run average, but the survey’s forward-looking components are beginning to reflect the (Purchasing Managers Index) PMI’s sombre message,” said Mr. Vistesen.
According to the survey, the new orders-to-inventory ratio remains depressed, and firms’ own production expectations slid below zero for the first time since Y 2014.
However, Pantheon economists expected that French production would be lifted by Oil refining in Q-3 of Y 2016.
Private investment in France has performed admirably this cycle, Mr. Vistesen noted. Growth in manufacturing and private services CAPEX has been close to previous cyclical highs since the middle of last year. As well, the separate semi-annual quarterly investment survey suggests that firms’ investment plans for Y 2016 are resilient.
Construction could become a critical swing factor for French investment in the second half of the year, Pantheon economists said. “But we are cautiously optimistic that (investment) growth will improve further; this would add a big boost to aggregate investment,” they added in a statement.
By Mu Xuequan
Paul Ebeling, Editor