Economic sentiment in EU falls to 2008 levels

Economic sentiment across the EU has fallen sharply in August to reach levels last seen since Lehman Brothers collapsed in Sept 2008.

The Economic Sentiment Indicator decreased by 2.0 points in the EU in August and by 1.8 points across the eurozone.

“The sustained fiscal austerity and muddling through approach to the crisis is increasingly taking its toll on economic confidence across the region.

“As such, these figures are a further wake-up call to eurozone policymakers to speed up their efforts in resolving the crisis,” said Brussels-based economist with ING Bank, Martin van Vliet.

“Although the ECB’s bond-buying plans may help ease the dislocation in sovereign debt markets, they would likely do little to kickstart growth. This implies that more unconventional monetary stimulus and a much weaker euro are likely to be needed to put the economy back on a path of sustained growth,”

In both the EU and the eurozone, the loss of confidence was more pronounced among consumers in the retail sector and in the construction industry.

“In the services sector the loss in confidence was marked in the euro area but more contained in the EU as a whole. On the contrary, while confidence in industry decreased in the EU, it remained broadly stable in the euro area,” the European Commission said in a statement.

Italy and Spain saw the biggest slippage in economic sentiment, but core countries such as Germany, Belgium, Austria, and Finland also saw marginal declines.

More surprisingly, Portugal and Spain both reported a slight increase in sentiment, albeit from very low levels.

Mr van Vliet argues that August’s decline in economic sentiment adds to signs that the eurozone economy may contract further in the third quarter after a 0.2% fall in the second quarter.

“The 1.8-point drop in the European Commission’s Economic Sentiment Indictor for the 17-country region, to 86.1, was larger than had been expected (consensus: 87.5) and left it at its lowest level since Sept 2009 — which happens to be only slightly above the levels seen in the immediate aftermath of the Lehman collapse a year earlier.

“On past form, the index is now consistent with quarterly falls in eurozone GDP of around 0.3%,” he added.