Euro-Area Confidence Sours With Economic Gauge at 1-Year Low

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Confidence in the euro-area economy fell to the lowest in a year as the impact of the war in Ukraine drained overall sentiment from industry to consumers. 

A gauge compiled by the European Commission declined to 105, far below the 108 median estimate of economists in a Bloomberg survey. Falling confidence was pronounced among manufacturers and consumers, with both those measures weaker than anticipated.  

While the data showed an easing in price expectations from a record the previous month, it still reflects the mounting impact on households and companies of surging inflation that reached a new high of 7.5% in data out on Friday. Against that backdrop, the European Central Bank faces pressure to lift interest rates.

Lower confidence suggests that high prices are likely to continue to weigh on consumption and investment as the region grapples with the fallout from the war just over its Eastern border. On top of that, strict pandemic lockdowns in China are further disrupting already strained supply chains.

Those factors will be key in determining whether the euro area can continue to grow. In the first three months of 2022, output barely rose across the region, with Italy seeing a contraction, France a stagnation, and Germany narrowly avoiding a recession.

Among manufacturers, the situation shows little sign of improvement. A survey of purchasing managers for April updated on Friday was confirmed to be at a 15-month low.  

Industrial confidence on the European Commission gauge fell to 7.9, more than a full point below the outcome anticipated by economists. 

For consumers meanwhile, the reading of -22 was the weakest in two years and revised down considerably from an initial result published last month. The new result reflects an overall change in the method of calculating seasonal adjustments, according to the Commission.

The gauge of inflation expectations fell back to 50 from 62.9, which was the highest ever measure since records began in 1985. 

The prospect of Russia shutting down gas shipments is likely to keep weighing on sentiment and could threaten a recession, according to observers. 

Even so, ECB Chief Economist Philip Lane cautioned in an interview on Friday that there's “still a lot of momentum” in the region's recovery from the pandemic. 

“We know from the near-time indicators, from what's going on right now, that there still seems to be reasonable activity right now here at the end of April,” he added.

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