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The Wilder View

Euro Area Crisis Hits Confidence in the Core

France’s INSEE business confidence, Germany’s Ifo business climate, and the National Bank of Belgium’s business survey demonstrate ongoing infection as the Euro area debt crisis hits business expectations in the core. Through July, business confidence in Germany and France continued to slide while that in Belgium rebounded, albeit from a low base.

Of note, the service industries in both Germany and Belgium may offer a “ray of hope” (the Ifo Institute puts it.), as these large economic sectors are perhaps stabilizing in the surveys.

Furthermore, consumer confidence in the Netherlands and Italy remain depressed. Notably, the July prints increased 8 and 1.1 points, respectively, over the month – is this the start of a trend, or rather a dead-cat bounce? If I were a betting girl, I’d go with the latter, given the weakness in labor markets and election cycles coming up (September in the Netherlands and TBA in Italy).

In Germany, the Ifo survey has deteriorated swiftly in recent months. This now brings this survey more in line with other business surveys, such as the German PMI, which had shown a more pronounced economic decline.

The Ifo Business Climate survey contains a wealth of information, but is generally dissected into assessment of the current business situation and expectations of the future business environment. The current environment survey, 111.6 in July, fell over the month but remains above the longer term average, 102. In contrast, expectations as regards the future business environment are falling swiftly. The Euro area crisis is impacting the business decision process.

Finally, as demonstrated in the Ifo Business Climate survey that highlighted its ‘significant deterioration’, the manufacturing base is leading the way down. In France and Germany, Markit Manufacturing PMIs hit the low 40s, 43.6 and 43.3, respectively in July. This implies a quickening of the pace of contraction across the French and German manufacturing bases with not much hope of near-term relief, neither from domestic nor foreign demand. The Dutch Statistical Agency, CBS, today reported further decline of Dutch manufacturing opinions in July, as manufacturers anticipate layoffs.

My only question becomes how much weakness is needed in the core (Germany) to get a(nother) significant response from the ECB?

Rebecca Wilder

One Response to “Euro Area Crisis Hits Confidence in the Core”

Patrick_VBJuly 26th, 2012 at 3:17 pm

Hello Rebecca,
The slowdown in Germany has been in the cards for several months now, so I guess there's no real surprise here. As for further conventional action from the ECB, I wouldn't expect it to lower its main refi rate much more; and even if it did lower the rate from 0.75% to 0%, I don't think this would be the answer to the current crisis, given that policy rates are already so low and that the proper transmission of policy rates is impaired. Growth in the euro area is being held up mainly by other factors, such as institutional paralysis and incompetent governance and the ensuing confidence effects, pro-cyclical budgetary austerity, and well, yes, too much (private and public) debt in too many euro area countries. As I see it, the only way forward now is through significant loss recognition: debt levels will have to be cut by making (all types of) creditors take significant writedowns… Of course, this would have to come with important euro area institutional changes too…

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Emre Deliveli is a freelance consultant, part-time lecturer in economics and columnist. Previously, Emre worked as economist for Citi Istanbul, covering Turkey and the Balkans. He was previously Director of Economic Studies at the Economic Policy Research Foundation of Turkey in Ankara and has has also worked at the World Bank, OECD, McKinsey and the Central Bank of Turkey. Emre holds a B.A., summa cum laude, from Yale University and undertook his PhD studies at Harvard University, in Economics.

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