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Euro-area economic confidence declines to lowest in five months

[FRANKFURT] Euro-area economic confidence slumped more than analysts predicted in January, strengthening the European Central Bank's case for increasing stimulus.

An index of executive and consumer confidence fell to 105 from a revised 106.7 in December, the European Commission in Brussels said on Thursday. That's the lowest since August and compares to a median estimate for a drop to 106.4 in a Bloomberg survey of economists. The figure for December was previously reported at 106.8.

"We've had increased turbulence in financial markets, and that normally has a spillover effect on confidence," Ken Wattret, chief euro-zone market economist at BNP Paribas SA in London, said before the report. While the external growth backdrop has worsened, "the trend is still positive; the trend still suggests that economic conditions in the euro area are resilient," he said.

ECB President Mario Draghi has held out the prospect of yet-looser monetary policy as early as March to nurture growth and bring inflation back in line with the institution's goal of just under 2 per cent. The Governing Council extended quantitative easing by six months in December and cut the deposit rate to minus 0.3 per cent before holding policy steady this month.

Sentiment in the euro area deteriorated across most sectors amid uncertainty over global economic prospects. The Federal Reserve opened the door to a slower pace of interest-rate increases as China struggles to cope with financial-market turmoil and a slowdown in growth.

A gauge for confidence in euro-area industry slid to minus 3.2 in January from minus 2 in December, according to the report. A measure for services fell to 11.6 from 12.8. Sentiment among consumers and builders also deteriorated.

Euro-area inflation stood at just 0.2 per cent in December, and a Bloomberg survey of economists projects it ticked up slightly to 0.4 per cent in January. Eurostat will release the data on Friday.

Meanwhile, the European labor market is continuing a long slog toward normality. Joblessness fell to 10.5 per cent in November. That's down from a 2013 high of 12.1 per cent but still above an 8.7 per cent average in the decade following the introduction of the euro in 1999.

As unemployment recedes, the economy is forecast to expand steadily at a rate of 0.4 per cent a quarter through the middle of 2017, according to a separate Bloomberg survey. Growth is being driven by consumers, whose disposable income is bolstered by the falling oil prices that hold down inflation, while exports stand to suffer from weaker global trade.

"The drop in the oil price has clearly boosted household real disposable income," Neville Hill, an economist at Credit Suisse Group AG in London, said before the report. "Employment growth is strong and positive, and unemployment is falling, and at the same time financial conditions are clearly easing."