BLBG: Euro-Area Confidence Unchanged as Deflation Risks Damp Outlook
Economic sentiment in the euro area was unchanged in December, underlining the fragile state of the recovery two weeks before the European Central Bank decides whether more stimulus is needed.
An index of executive and household confidence remained at 100.7 in November, the European Commission in Brussels said today. Economists predicted an increase to 101.2, according to the median of 19 estimate in a Bloomberg News survey.
The report comes a day after data showed the region’s inflation rate fell below zero for the first time in more than five years. Policy makers, who probably discussed quantitative easing at an informal dinner in Frankfurt last night, disagree about whether action is required, with some arguing deflation risks have increased and others pointing to the stimulating effects of lower prices on the economy.
The Trouble With Falling Prices
“Growth is very weak,” said Nick Kounis, head of macro research at ABN Amro Bank NV in Amsterdam. “Policy makers need to do what they can to support demand. The economy can do with more monetary stimulus.”
Industrial confidence deteriorated to minus 5.2 in December from minus 4.3 in November, according to today’s report. Sentiment in the services sector rose to 5.6 from 4.4. Confidence in retail trade, construction and among consumers also improved.
Deflation Risks
While December forecasts by the ECB for growth of 1 percent this year and 1.5 percent in 2016 may prove too pessimistic amid a slump in the cost of oil, inflation projections of 0.7 percent and 1.3 percent, respectively, are probably too high. The predictions were finalized before the most recent decline in crude.
ECB President Mario Draghi has said that deflation risks “cannot be entirely excluded” and may demand a response.
Euro-area producer prices fell 1.6 percent in November from a year earlier, marking the 16th consecutive annual decline, according to a separate report. At the same time, retail sales rose for a second month, with a 0.6 percent gain from October exceeding economists’ estimates.
Markit Economics said this week that surveys of purchasing managers suggest the economy expanded 0.1 percent in the fourth quarter. A gauge of German manufacturing and services activity signaled only “lackluster” growth, while French output declined for most of 2014 and a measure for Italy showed a return to contraction in December.
A first estimate of euro-area gross domestic product in the fourth quarter will be published on Feb. 13. Economists in Bloomberg’s monthly survey predicted in December that the economy expanded 0.2 percent in the final three months of the year, matching the growth rate of the previous period.
“The massive fall of prices for crude oil is a blessing for the sluggish economy in the euro zone,” said Christoph Weil, senior economist at Commerzbank AG in Frankfurt. “Consumers are paying much less for petrol and heating oil and suddenly have more money in their pockets for buying other items. And business are also glad, thanks to the lower energy prices, their production costs are declining.”
To contact the reporter on this story: Corina Ruhe in Amsterdam at cruhe@bloomberg.net
To contact the editors responsible for this story: Fergal O’Brien at fobrien@bloomberg.net Jana Randow, Zoe Schneeweiss
