Europe Economic Confidence Improves to Two-Year High

Europe Economic Confidence Improves to Two-Year High

April 29 (Bloomberg) -- European confidence in the economic outlook improved to the highest in more than two years in April amid signs the euro-area recovery is strengthening even as Greece’s fiscal crisis spreads to other countries.

An index of executive and consumer sentiment in the 16 euro nations rose to 100.6 from a revised 97.9 in March, the European Commission in Brussels said today. That’s the highest since March 2008 and exceeded the 99.4 median estimate of 24 economists in a Bloomberg News survey. The commission’s index is based on a survey of companies and households conducted between April 1 and April 10.

Accelerating global economic growth is boosting sales at European companies including Bayerische Motoren Werke AG, the world’s biggest maker of luxury vehicles. While that is bolstering confidence, Greece’s budget crisis is expanding across the region, threatening the recovery. Stocks and bonds have plunged in Europe on concern about a state default.

Greece will be a “multi-year headache for the euro region,” said Marco Annunziata, chief economist at UniCredit Group in London. “Volatility is increasing, with a few signs of incipient panic. If contagion became systemic, it would deal a potentially crippling blow to the euro-region growth outlook.”

Investor concern about a European fiscal crisis has helped pushed the euro down 11 percent against the dollar in the past six months, making it the worst performer among its 16 most- traded peers. The single currency traded at $1.3247 at 10:01 a.m. in London, up 0.2 percent on the day.

Greece’s Credit

Standard & Poor’s this week downgraded Greece’s credit rating to junk and also lowered its ratings on Spain and Portugal. S&P yesterday cut Spain’s credit rating to AA, a day after paring Portugal’s to A-.

Greece on April 23 called for activation of a financial lifeline of as much as 45 billion euros ($59.5 billion) following a surge in its borrowing costs. As the fiscal crisis spreads beyond Greece, economists said yesterday that more than 10 times that amount may be needed to contain the turmoil.

The Greek aid package “doesn’t ease my fears,” said Rossa White, chief economist at Davy Stockbrokers in Dublin. “I’d certainly like to see a much clearer plan how they’re going to tackle their finances. I’d like to see concrete measures.”

The extra yield that investors demand Greek 10-year bonds over German bunds has surpassed 8 percentage points. The premium on Portuguese bonds rose to 277 points this week, the most since 1997. The spread on Spanish debt increased to the most in more than a year and the spread on the bonds of Italy, the euro area’s third-largest economy, was the highest since July.

Fiscal Crisis

The commission had previously reported a March reading of 97.7 for euro-area economic confidence. A gauge measuring confidence among manufacturers rose to minus 7 in April from minus 10 in the previous month and an indicator for consumer optimism increased to minus 15 from minus 17 in March, today’s report showed.

European companies may rely on an export-led recovery to help bolster sales this year as consumers hold back spending. Global growth will probably accelerate to 4.2 percent this year, the fastest pace since 2007, the Washington-based International Monetary Fund forecast on April 21. Emerging economies including China and India will lead a worldwide recovery, expanding 6.3 percent in 2010, the fund said.

Norbert Reithofer, chief executive officer of Munich-based BMW said on April 23 that the company expects full-year sales in China to beat its previous forecast. Jean-Paul Agon, CEO at L’Oreal SA, the world’s biggest cosmetics maker, said the same day that the fastest sales growth in almost three years in the first quarter confirmed “the confidence we already had.”

Capacity Utilization

“The order dynamic will remain positive over the coming months with Asia boosting export demand,” said Andreas Scheuerle, an economist at Dekabank in Frankfurt. “The first quarter was probably still weak followed by a strong economic performance in the current three-month period.”

Manufacturers’ capacity utilization rose to 75.5 percent in the second quarter from 72.3 percent in the previous three months, the commission said today. That’s the highest since the fourth quarter of 2008. Companies also grew more optimistic about the order outlook and employment prospects.

European unemployment probably remained at 10 percent in March, according to a Bloomberg survey. That’s the highest since August 1998. The European Union’s statistics office in Luxembourg will release the jobless report tomorrow at 11 a.m.

Consumers are already growing less optimistic that a recovery will feed into the labor market. A gauge measuring households’ expectations of euro-region unemployment over the next 12 months fell to 36 from 46 in March. An indicator of consumers’ price expectations over the next 12 months rose to 8 from 4 in March, today’s report showed.

“Challenges remain great,” said Volker Kronseder, CEO of Krones AG, a German maker of bottling and packaging equipment, on April 27. “We are doing everything we can to further strengthen the company, including cost-cutting measures.”

source: bloomberg.com