Euro zone economic sentiment fell for a second successive month in April, and at an increased rate, European Commission data showed on Monday, strengthening the case for a cut in interest rates this week.
Monday’s survey “supports other evidence that the euro zone is experiencing its longest recession on record,” said Jennifer McKeown of Capital Economics, in a note to clients.
The Economic Sentiment Indicator for the 17-country euro zone fell to 88.6 in April from 90.0 in the prior month. That’s the lowest since December. Economists polled by Reuters had expected a decline to 89.3.
Looking at the details, all sub-indexes have declined in April to their lowest level since the beginning of the year, except for consumer confidence. Indeed, the index increased slightly from negative 23.5 to negative 22.3, but remains at a very weak level.
More worrying, the forward-looking components of the indexes are worsening or remaining at depressed levels.
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Furthermore, most euro zone countries saw a decline in economic sentiment in April, significantly including Germany as well as France and Italy. There was improvement in Spain and Greece, but in both countries confidence is still low.
“All these indicators suggest uncertainty has been increasing in the euro area since the beginning of the year,” Societe Generale’s Herve Amourda said in a note.
Following on from the weak April services and manufacturing purchasing managers surveys, the marked drop in economic sentiment indicates that euro zone economic contraction is continuing in the second quarter of this year after gross domestic product almost certainly declined for a sixth successive quarter in the first quarter, according to IHS Global Insight economist Howard Archer.
This would mean seven consecutive quarters of economic contraction – the longest region-wide recession on record. Moreover, inflation has continued to fall, reaching a 31-month low of 1.7 percent in March, which is easily below the European Central Bank’s 2 percent price stability ceiling.
The appreciable retreat in euro zone sentiment to a four-month low in April intensifies pressure on the ECB to cut interest rates. After leaving interest rates at 0.75 percent at its April meeting, the ECB conceded that the economic outlook had deteriorated and raised markets’ hopes of further policy support by pledging that it stood “ready to act.” ECB President Mario Draghi said that there had been an “extensive” discussion about an interest rate cut but that “the consensus was, for the time being, not to look at rates.”
“Having stated following its last meeting that it stood ready to act, it would be a big disappointment if the ECB did nothing at the forthcoming meeting on May 2,” McKeown said. “If the ECB does hold fire on interest rates on Thursday, it is very likely only delaying the inevitable.”
McKeown thinks that an interest rate cut will make little difference to the bleak economic outlook.
“Unconventional policies could be more effective, but these seem set to focus again on encouraging banks to lend,” McKeown said. “Bolder moves such as outright asset purchases are still not on the ECB’s agenda, unless they are sterilized and preceded by a bail-out request and the acceptance of strict fiscal conditions.”