Sunday, September 2, 2012

Sentiment indicators point to a deepening recession in the Eurozone, including "core" economies

Since we've been discussing sentiment indicators recently, let's turn our attention for a moment to business and consumer sentiment in the Eurozone. The confidence index from the European Commission now shows the Eurozone recession deepening.

European Commission Economic Sentiment Indicator Eurozone (Bloomberg)

This weakness in sentiment is to be expected given the Eurozone's unemployment rate of 11.3% and the under-25 unemployment of exactly double that rate. What is new here is the low confidence reading in the Eurozone's core.
WSJ: - Confidence among euro-zone consumers and businesses fell to its lowest level in three years in August, official data showed, suggesting economic weakness in the debt-saddled currency bloc will continue, and is likely to spread further to core economies, such as Germany.

The European Commission said Thursday its monthly Economic Sentiment Indicator fell to 86.1 in August from 87.9 in July, the fifth-straight monthly drop and the weakest level for the combined gauge of business and household sentiment since August 2009.
The most severe decline was not surprisingly in Spain, while Italy had the lowest reading among the largest nations of the Eurozone. France showed a slight uptick, though the confidence measure remains low.

European Commission Economic Sentiment Indicator Eurozone by nation (Bloomberg) 

It is becoming clear that it's no longer just an issue for the periphery nations, as Germany now also
shows signs of an economic decline (see discussion). Another sentiment indicator released earlier called the ZEW Index - which tends to be more sensitive to changes in confidence - shows a similar trend.

Source: ZEW

WSJ: - "There is clear evidence here that the euro zone as a whole, and not just the periphery, is in need of policy support," Ms. McKeown said, making reference to possible action by the European Central Bank. The ECB Governing Council, which meets Sept. 6, declined to cut its key interest rate or take other action to support the economy at its August meeting.

Signs of weakness in the German economy, evident in Thursday's data, could heighten calls for ECB action and fuel concern about the euro zone's prospects.

The country has been the major source of financial support for struggling member states, and a flagging domestic economy could damage its willingness or ability to bankroll any rescue efforts needed in the future.

Underlining the country's growing problems, the commission said business and household sentiment in Germany weakened for a sixth straight month, to a reading of 95.8 from 96.8.
The WSJ comment that "flagging domestic economy could damage [Germany's] willingness or ability to bankroll any rescue efforts" remains a topic of debate. Are the Germans actually less inclined to support the ECB's bond buying program and a more potent ESM structure because of their own economic difficulties? Some argue it's just the opposite.

Whatever the case, the weakness in sentiment indicators across the Eurozone certainly gives the ECB more ammunition to fix the "monetary transmission" problems. And a targeted bond buying program is the only tool the ECB can come up with at this stage. It seems that Europe's historical addiction to government support to fix all economic ills is shifting to a full dependence on central bank stimulus.
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