Euro Area Economic Sentiment Sours

The European Commission's Economic Sentiment Indicator for the Euro Area fell below its long time average of 100 to 98.3 in August, the first time it has been below 100 since June of 2010. As can be seen in the first chart, the indicator has fallen in each month since February of this year, reflecting rising concerns over the deteriorating financial conditions both in Europe and the United States.

Of the five areas surveyed by the EC, four--Industrial, Service, Consumer and Retail Trade--have contributed to the decline in sentiment. The declining trend in confidence in these areas is shown in the second chart. The only area to show a positive trend in confidence is Construction, but even with some improvement, pessimists in the Construction field still outweigh the optimists by 23%.

The survey of industry reveals a declining trend in orders. The balance of pessimists over optimists regarding orders increased to 9.1% in August from 4.7% in July. In addition more industrialists are seeing a build up of inventories and lower production. The balance of opinion on inventories rose to 5.1% in August from 2.5% in July and the balance on expected production declined to 5.6% from 9.8% in July.

Even in the service area where the optimists still exceed the pessimists, if by only 3.7%, confidence in the present situation, and in current and expected demand are all weakening. The balance of opinion regarding the present situation fell to 0.2% in August from 5.3% in July. Comparable figures for current demand are 4.0% and 7.9% and for expected demand are 6/8% and 10.5%.

Pessimists tend to dominate optimists in the consumer area and they have become more numerous in the last two months. The balance of opinion on the financial situation was -7.2% in August compared to -7.2% in July, but consumers were much more pessimistic about the general economic situation. The balance of opinion on the general economic situation was -23.4% in Augusts compared with 14.2% in July. Consumers were also more pessimistic about job prospects. The balance between those seeing increased unemployment and those seeing decreased rose to 25.5% in August from 16.1% in July.

The decline in confidence in the retail trade area is due, in part, to increasing concern over current and expected business conditions and over rising inventories. The excess of those who expect a rise in inventories over those who expect a fall has increased to 13.5% in August from 10.5% in July. While the pessimists regarding the present situation in retail trade increased 5.0 percentage points to -7.4% in August, those regarding the expected situation increased even more by 7.3 points to -5.1% in August.