Eurozone business confidence fell to a five-month low in April, bolstering the case for an interest-rate cut by the European Central Bank at this week’s monetary policy meeting.
The European Commission’s economic sentiment indicator dropped 1.5 points in April to 88.6, as managers’ expectations of activity in both the manufacturing and services sectors fell sharply. The services sector suffered a 4.1-point drop, while industry fell 1.5 points.
Depressed business morale could force Mario Draghi, ECB president, to cut rates further in a desperate attempt to boost lending to companies and reignite economic growth, which has been battered by the worst economic crisis since the Great Depression of the 1930s.
“The April round of surveys was weak, and most likely disappointed the ECB. We think this will have implications for the central bank’s policy,” said Marco Valli, chief eurozone economist at UniCredit.
“We think the ECB will decide to remain on hold on Thursday and cut in June. But this is a very close call and the risk of a move already this week is high, just short of 50 per cent,” he added.
Carsten Brzeski, senior economist at ING in Brussels, said that although most financial market analysts expected a rate cut, the ECB could be more inclined to take “non-standard measures” to aide small and medium enterprises rather than lower interest rates further.
“A rate cut without additional efforts to repair the transmission mechanism would quickly go up in smoke and could even be regarded as an act of despair,” said Mr Brzeski.
“A rate without accompanying non-standard measures to repair the transmission mechanism does not make sense. This is why we expect the ECB to first announce new SME funding before cutting rates.”
The sharp drop in business confidence is in contrast with the encouraging signs recorded during the first months of the year when morale was on the rise as managers predicted that the worst phase of the economic crisis would soon be over.
However, the political instability in Italy, the eurozone’s third-largest economy, and the turbulent bailout of Cyprus have plunged the single monetary zone back into a state of uncertainty and economic weakness.
Cyprus was the worst hit, with confidence plummeting from 82 to 64.4 points. However, the overall index fell due to the slowdown suffered by the eurozone’s three largest economies: Germany, France and Italy.
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