German business confidence plunged the most in almost a year and sentiment deteriorated in Italy and France, keeping the euro region on an uncertain footing after a weak first quarter.
The numbers follow multiple reports hinting that momentum in the euro area is taking a breather. It’s inopportune timing for the European Central Bank, which is preparing to trim back stimulus later this year.
While President Mario Draghi said in March that strong growth was helping the ECB to achieve its inflation goal, he’ll be grilled after Thursday’s policy update on whether the latest figures have altered the outlook. Economists in a Bloomberg survey this month said he’ll take longer to lay out the exit strategy given the uncertainty.
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“If we look at the international environment, there are some sobering news coming in—the worldwide economy is cooling a little bit and that is reflected in orders,” Clemens Fuest, president of the Ifo Institute, said in a Bloomberg Radio interview after the release. “We can see this cooling down in other countries as well—we see it in the entire euro zone.”
The institute’s business climate measure for Europe’s largest economy fell to 102.1 in April from 103.3 in March. That was the biggest drop in 11 months and sharper than economists had forecast. In France and Italy, measures tracking confidence also fell, highlighting the risks facing the region’s companies as growth appears to come off its peak and threats of a global trade war loom.
One piece of good news came from the ECB’s Bank Lending Survey, which showed increased loan demand from enterprises and households. In Germany, the Bundesbank has also expressed confidence, saying the country’s boom is set to continue even amid softer growth.
A gauge of German economic activity published Monday signaled that the recent weakness is leveling off, while one for the euro area indicated that momentum kept a steady pace in April after slowing earlier in the year.
An additional challenge facing the region’s exporters is the prospect of a brewing U.S.-China trade war. Metal tariffs could impact German carmakers such as Daimler AG and BMW AG, which are estimated to ship more than 100,000 vehicles from the U.S. to the Asian country. Companies from Airbus SE to Puma SE have cited potential trade restrictions as well confusion around Brexit as risks.