Euro business confidence in steep decline

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Fear of a slowing economy has led to a big fall in business confidence across Europe, while companies in the largest emerging markets show no sign of similar nerves, according to a closely watched business survey.

The confidence in the European business outlook of earlier this year has given way to much weaker expectations for business activity, revenues, profits, capital spending and employment. In contrast, corporate confidence in Brazil, Russia, India and China, the so-called Bric countries, is sky high.

The findings of the KPMG/NTC business outlook survey reflect the effects of the global credit squeeze, which has hit the financial sectors in advanced economies at the same time as the Bric economies appear to be havens.

The International Monetary Fund and European Commission have both recently reduced their forecasts of economic growth next year in the US and European countries.

With Russia, India and China accounting for half the world’s economic growth for the first time in 2007, emerging markets arguably now have sufficient weight in the global economy to withstand an advanced world financial crisis.

Andrew Smith, chief economist of KPMG, said: “The marked contrast between the very high levels of business optimism in the Bric countries and the much more muted response in the EU highlights their differing growth dynamics as we head into 2008.”

Both the European Central Bank and the Bank of England pay close attention to the monthly pan-European purchasing managers’ indices, published by the consultancy NTC Economics.

KMPG and NTC’s twice-yearly business outlook survey of the same 2,800 service-sector companies provides a picture of how they are planning for the future.

It shows that, across Europe, more companies are optimistic about the outlook, but confidence has weakened sharply. While 35 per cent more service sector companies in October were optimistic than pessimistic about business activity in the year to come, that positive balance was down from 47 per cent in April and the lowest balance since the survey started in 2006.

Sharp falls in confidence were also recorded in profits, down from a positive balance of 25 per cent to 15 per cent, with the majority of financial sector companies expecting profits to fall next year. Employment intentions were also slipping, with a balance down from 27 per cent in April to 19 per cent in October.

Of the 2,800 businesses surveyed in Europe, those
in Germany, the UK and Spain had the largest falls in confidence, with service sector optimism holding up much better in France and Ireland.

With the US economy slowing fast, the fate of the global economy now rests more than ever on the success of emerging economies. The hope is that they will maintain their economic momentum, helping mitigate any slowdown in advanced economies.

But the fear is that slower consumer spending in advanced economies will hit the export sectors of emerging economies next year, leading to a more widespread global economic slowdown.

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