EURONOMICS: Confidence At Risk From Financial Downturn
By Daniel Schwammenthal
Of DOW JONES NEWSWIRES
BRUSSELS (Dow Jones)--Business confidence in the euro zone is increasingly at
risk from plunging stock markets and a strengthening euro.
The most recent evidence comes in the form of surveys of business leaders in
Belgium and Italy, while Thursday brings the influential business sentiment
report from Germany's Ifo economic research institute, which is expected to
underline the fragile mood in the boardrooms of the euro zone's biggest
economy.
Both the Italian and Belgian surveys showed a drop in confidence for the
second consecutive month and confirm any upturn will be slower than previously
expected. Growth is at stake if these figures keep falling.
Bart Van Craenyest, economist for KBC in Brussels, had originally forecast an
improvement in Belgian business sentiment. "If the survey falls any further, we
can talk about a new turning point," he said.
The Italian business confidence index fell to 93.9 in July from 94.7, the
lowest in five months. The Belgian survey fell to -6.5 from -5.5, with the key
manufacturing index dropping almost two points.
Belgian's open economy is a bellwether for the larger euro zone. The vast
majority of its exports, which make up 75% of its gross domestic product, go to
its European neighbors.
"If Europe's recovery were to falter, we would first see it in Belgium," said
Peter Van Houte, economist at BBL in Brussels.
The reasons for the gloomier outlook are the same in Italy and in Belgium:
stock market gloom and the rapid improvement in the euro's exchange rate, which
makes exports from the area less competitive.
And with neither factor likely to improve soon, the outlook will remain
bleak.
"Business confidence won't rebound over the next few months," predicted Fabio
Scacciavillani, senior economist at Goldman Sachs in London.
Demand Stagnating
"The problem is that there is basically no real growth at all in euro-zone
domestic demand," said Norman Williams, economist at Barclays Capital In
London.
Consumers worried about unemployment are loath to spend, while the stock
market meltdown has heightened job fears.
In addition, the drop in share prices is hurting personal wealth, which also
has a psychological impact.
Although continental Europeans still invest less in equities than Americans,
the effect isn't negligible. In Belgium, for example, stock savings make up 45%
of GDP.
At the business level, many European multinationals are vulnerable, having
gone on a spending spree in the U.S. over the past decade, Daimler's takeover
of Chrysler being one of the more spectacular acquisitions.
The stock market's plunge will hurt the value of their U.S. subsidiaries. At
the same time, the weaker U.S. dollar translates into fewer euros for their
bottom line.
The danger now is that European businessmen will cut spending as the climate
worsens.
"Firms who believe they have little reason for enthusiasm may rein in on
investment plans or not carry them out at all, said Ed Teather, economist at
UBS Warburg in London.
-By Daniel Schwammenthal, Dow Jones Newswires; +32 2 473 555 321;
daniel.schwammenthal@dowjones.com
(END) Dow Jones Newswires 24-07-02 |
