Euro area economic sentiment declined more than expected in May to its lowest level in nearly three years, as the worsening economic situation damped firms' confidence, particularly those in the manufacturing, retailing and services industries.
The European Commission said Wednesday that the economic confidence index declined to 90.6 in May from a revised reading of 92.9 in April. Economists were forecasting the a drop in the index to 91.9. This was the weakest reading since October 2009.
Sentiment deteriorated in most of the member states, with Italy and the Netherlands recording the steepest drops. France, Germany and Spain also experienced a fall in sentiment levels in May.
"The bleak growth outlook suggested by today's figures is illustrating the negative feedback loop between recession and austerity," said Peter Vanden Houte, an economist at ING Bank NV.
The industrial confidence indicator deteriorated to -11.3 in May from -9 in April. This also exceeded economists forecast of -10.2. The confidence index for retailers plunged to -18.1 in May from -11.1 in the previous month.
The services confidence index came in at -4.9, down from -2.4 in the prior month. The confidence indicator for construction industry dropped to -30.1 from -27.5.
This is not surprising given that the economic fundamentals currently look an unhealthy mix for consumer spending across the Eurozone - high and rising unemployment, recent sticky inflation, generally muted wage growth and tightening fiscal policy in many countries, said Howard Archer, Chief Economist at IHS Global Insight.
The consumer confidence index improved marginally to -19.3 from -19.9, but failed to offset the negative impact from declining sentiment in other sectors. The May reading matched the flash results released earlier this month. The increase was based mainly on improved expectations about the future general economic situation and a significant easing of unemployment fears in both regions.
A separate report From the Commission revealed that the business climate indicator for the euro area decreased by 0.26 points to -0.77. This was forecast to be at -0.67.
New Greek elections and deepening Spanish banking crisis are adding to the Eurozone gloom. With the crisis showing no signs of abating, at least in the near term, sentiment is likely to slide down further in the coming months.
According to the latest purchasing managers' survey by Markit Economics, euro area private sector shrank at the fastest pace since April 2009. The economy narrowly escaped recession in the first quarter as the gross domestic product stagnated after a 0.3 percent contraction in activity in the fourth quarter of 2011.
Paris-based Organization for Economic Co-operation and Development has forecast the euro area to contract 0.1 percent in 2012. The European Commission estimates 0.3 percent contraction.
by RTT Staff Writer
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