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More stimulus needed as European confidence falls

Published August 28, 2014 10:52 am

Economy • Consumer sentiment declines more than two dozen economists expected.
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Madrid • Euro-area economic confidence declined more than economists predicted in August, backing President Mario Draghi's warning that more stimulus may be needed.

An index of executive and consumer sentiment fell to 100.6 from a revised 102.1 in July, the European Commission in Brussels said Thursday. The median forecast in a Bloomberg News survey of 25 economists was for a drop to 101.5.

With investors' price expectations for the euro area sliding and data forecast to show inflation at the weakest since 2009 and stubbornly high unemployment, Draghi has signaled he's moving closer toward quantitative easing. Manufacturing and services activity slowed in August amid rising political tensions in Ukraine and the Middle East, after the 18-nation economy stagnated in the second quarter.

"A decline in confidence among businesses and households is driving the dip" in the economy, said Timo del Carpio, an economist at RBC Capital Markets in London. "Nevertheless, improving financing conditions, growth in key trading partners and supportive monetary policy should all support a pickup in the second half."

ECB policy makers meeting next week are set to debate whether the unprecedented range of measures announced in June that included a negative deposit rate and targeted long-term loans are enough to steer the euro area away from deflation and foster growth. One guide the Frankfurt-based central bank can turn to is new economic forecasts to be published on Sept. 4.

The Governing Council will use "all the available instruments needed to ensure price stability" and is "ready to adjust the policy stance further," Draghi said last week at the Federal Reserve Bank of Kansas City's annual economic symposium in Jackson Hole, Wyoming. He pointed out that the ECB's preferred gauge of inflation expectations had fallen below 2 percent.

Companies' performance and their business outlook have diverged. Adidas AG, the world's No. 2 sports-gear maker, cut its profit forecast for 2014. Meanwhile, Europe's largest tiremaker Michelin & Cie. has said it expects an improvement in European markets in the second half.

Industrial confidence fell to minus 5.3 in August from minus 3.8 in July and construction sentiment dropped to minus 28.4 from minus 28.2, according to Thursday's report. Sentiment in the services industry declined to 3.1 from 3.6. Consumer confidence was at minus 10, in line with a preliminary reading on Aug. 21.

"Sentiment has taken some hits in the past months in relation with the conflict in Russia-Ukraine," said Pernille Bomholdt Nielsen, an analyst at Danske Bank in Copenhagen. "Still, activity in the second half should be supported by private consumption while the negative impact from a strong euro and declines in lending should be less strong."

The euro-area economy will grow 0.3 percent in the third quarter and 0.4 percent in the final three months of the year, according to a separate survey of economists.




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