European confidence in the economic outlook unexpectedly improved this month as executives and consumers weathered tougher government budget cuts by countries struggling to convince investors that they won’t need external aid.
An index of executive and consumer sentiment in the 16 euro nations rose to 103.2, the highest since January 2008, from a revised 102.3 in August, the European Commission in Brussels said in an e-mailed statement today. That compares with economists’ forecast for a decline to 101.3, based on the median of 28 estimates in a Bloomberg News survey.
Europe’s recovery may lose some momentum after surging exports and a rebound in investment helped fuel the fastest growth in four years in the second quarter. While business sentiment in Germany also unexpectedly rose this month, the European Commission on Sept. 13 forecast a more “moderate” expansion in the second half of the year as governments from Ireland to Portugal step up spending cuts to push down deficits.
“We expect sentiment to top out in the period ahead and then trend down into 2011,” said Ken Wattret, an economist at BNP Paribas in London. “Industrial sentiment in particular is vulnerable to a correction.”
The euro rose as much as 0.2 percent against the dollar after the report was published and traded at $1.3600 as of 11:19 a.m. in London. Bonds were little changed, with the yield on the 10-year German bund at 2.25 percent.
A gauge of sentiment among manufacturers rose to minus 2 in September from minus 3, while services confidence gained to 8 from 7. The index of consumers’ confidence remained at minus 11, while retailers’ grew more optimistic, with that measure rising to minus 1 from minus 3.
The increase in confidence comes as fiscal concerns continue to weigh on Irish and Portuguese bonds. The decline has increased the extra yield investors charge to hold the 10-year debt of those nations rather than German bunds. The Irish yield premium was at 452 basis points today, compared with 353 a month ago, while for Portugal, it was at 431 basis points, up from 332.
Former European Central Bank Vice President Lucas Papademos said in an interview in Brussels on Sept. 27 that he’s “confident” governments will take the “appropriate actions” to push down budget deficits and help restore investor confidence. Uncertainty “is always a factor that tends to lead to excessive reactions on markets,” he said.
“Market tensions will stiffen resolve and the adjustment process will continue,” Paul Mortimer-Lee, head of market economics at BNP Paribas in London, said in a Sept. 27 report. “In respect of spreads, the chronic problems and the risk of external shocks are likely to lead to periodic tensions, though we warn against becoming alarmist.”
Some data indicate the euro-area recovery is already cooling. Growth in services and manufacturing industries slowed this month, while in Germany, Europe’s largest economy, investor confidence dropped to a 19-month low. Pernod Ricard SA, the maker of Chivas Regal whiskey and Absolut vodka based in Paris, on Sept. 2 said it is seeing “persistent difficulties” in Western Europe.
The commission’s gauges measuring manufacturers’ confidence in their export orders and total order books both rose to minus 16 in September from minus 18 in August, today’s report showed. An index of employment expectations increased to minus 4 from minus 6. Among services executives, a gauge of demand expectations for the next three months gained to 10 from 8.
ECB President Jean-Claude Trichet said on Sept. 27 that there is “continuing uncertainty” about the outlook. ECB officials will hold their next policy meeting on Oct. 9 after last month extending emergency measures for banks into 2011. Signs that the global recovery is flagging has also prompted reaction from the Federal Reserve, which said on Sept. 21 it’s prepared to ease policy further if needed. In the U.K., Bank of England official Adam Posen said yesterday that “further easing should be undertaken.”
“We know the second half of the year is going to be worse than the first half of the year because of the tailwinds to growth from the fiscal stimulus” turning into austerity, New York University Professor Nouriel Roubini said on Sept. 27. “The main scenario is an anemic recovery.”