Brexit hits euro outlook

Economic sentiment in the 19 countries sharing the euro fell in August to its lowest level since March, a further indication that morale is weakening after Britain voted to leave the EU.

The European Commission’s eurozone Economic Sentiment Indicator — the ESI fell to 103.5 in August from 104.5 in July, its lowest level since March and well below the 104.1 forecast in a poll of 38 economists. Estimates had ranged from 103.0 to 104.9.

Confidence fell in four of the eurozone’s five largest economies, with the exception of France where the index rose slightly in August.

“While the impact of Brexit on eurozone survey data had been muted so far, businesses have now caught up to a combination of Italian banking problems, the Brexit vote and geopolitical worries,” ING economists said in a note.

Britain voted to leave the EU in the June 23 referendum, though the terms of the exit are still to be negotiated, adding to the economic uncertainty.

In Italy, where the banking system is struggling with €360bn in bad loans, confidence fell to an 18-month low. The data add to the worries of the ECB, which is set to meet on Thursday next week.

“The general weakness of ESI across the euro zone suggests that more fundamental forces are weighing on growth, such as the fading boost from previous declines in oil prices and the euro exchange rate,” economists at Capital Economics wrote.

The ECB has cut rates deep into negative territory, given banks free loans and is buying €80bn worth of assets per month, but inflation has hovered near zero and is likely to undershoot its 2% target for at least two more years.

Morale among industry managers fell to -4.4, as the assessment of current order books fell at its sharpest level since February 2009.

Confidence among managers in the services sector also fell to 10, caused by a drop in demand expectations. The commission’s business climate indicator fell to low of almost three years of 0.02 from 0.38 in July.

“Managers’ assessments of past production, the level of overall and export order books deteriorated markedly,” the commission said in a statement accompanying the numbers.

German annual inflation slowed unexpectedly in August, preliminary data showed.