Eurozone businesses and households became markedly less upbeat about their prospects in January as financial markets world-wide tumbled in response to concerns about weaker growth prospects in China and other large developing economies.
The weakening of confidence is a setback for the eurozone economy’s modest economic recovery, since it may make households less willing to spend, and businesses less inclined to invest. If sustained in February, the waning of optimism would increase the likelihood that policy makers at the European Central Bank will decide to provide additional stimulus when they next meet in early March.
Warning that renewed falls in commodity prices had “significantly” weakened the outlook for consumer prices this year, the ECB’s governing council last week said it would reconsider its policy stance at that gathering, an indication that it is prepared to do more to support growth and lift the annual rate of inflation toward its target of just under 2% from 0.2% in December. In subsequent speeches, ECB President Mario Draghi has talked up the prospects of additional stimulus.
The European Commission Thursday said its Economic Sentiment Indicator-?which aggregates measures of consumer and business confidence?fell to 105.0 in January from 106.7 in December. That was the lowest reading since August, and marked a larger fall than the decline to 106.5 forecast by economists who were surveyed by The Wall Street Journal last week. However, the measure remained well above its average of 100.00 going back to 1990, an indication that eurozone business and consumers remain relatively optimistic.
“The European Commission’s survey bolsters the case for further ECB stimulus in March on both the inflation and growth fronts,” said Howard Archer, an economist at IHS Economics.
Among the eurozone’s five largest members, confidence weakened most sharply in Spain, which likely reflects a prolonged period of political uncertainty after inconclusive December elections. But confidence measures also fell sharply in Germany, the eurozone’s largest economy and its export powerhouse, and Italy. By contrast, confidence rebounded in France after a December dip following the terror attacks on Paris in the previous months, while Dutch businesses also became slightly more optimistic.
Manufacturers were most affected by the turmoil in financial markets and worries over the fate of China, with the eurozone measure of confidence in that sector falling to minus 3.2 from minus 2.0 in December. That reflected a reported thinning of order books, including export orders. But confidence also declined among service providers and construction companies.
Confirming a preliminary report released last week, the Commission said consumers also became less optimistic during the month, reflecting renewed concerns about the outlook for the eurozone economy. They also marked down their expectations for inflation over the coming 12 months, a development that will concern the ECB. Policy makers worry that lower oil prices will lead consumers to expect smaller increases for prices of other goods and services, which in turn would make it more difficult for the central bank to push the inflation rate toward its target.
Figures from Germany and Belgium released Thursday indicated that the annual rate of inflation in the eurozone picked up in January. Measured according to a common European standard, Germany’s inflation rate doubled to 0.4% from 0.2% in December.
But economists expect January’s pickup in inflation to prove short-lived, as declining energy prices feed into inflation measures over coming months. Speaking at a news conference last week, Mr. Draghi warned that consumer prices may even start to fall again after just four months of increases.