Euro zone economic confidence plunges, price pressures soar
By Balazs Koranyi
Euro Zone Economic Sentiment and Inflation Trends
FRANKFURT, April 29 (Reuters) - Euro zone economic sentiment plunged to a three-and-a-half-year low this month as the Iran war hit the services sector hard and inflation continued to rise, even as lending figures showed modest signs of resilience, a raft of data showed on Wednesday.
The euro zone economy has been hit hard from the fallout of the war and a raft of surveys this week are offering some early glimpses into just how bad the 21-nation currency bloc may be hit.
Economic Growth and Price Pressures
The figures point to surging prices and plunging economic growth, a dilemma for the European Central Bank as it is keen to arrest inflation but any policy tightening is bound to hurt already fragile growth.
European Commission Economic Sentiment Indicator
The European Commission Economic Sentiment Indicator fell to 93.0 this month from 96.6 a month earlier, coming well below expectations as the services component plunged to a five-year low.
Drivers of Declining Sentiment
"The decline of the Economic Sentiment Indicator was driven by plummeting confidence among consumers, as well as managers in services and retail trade," the European Commission said. "Services confidence declined by a lot, reflecting managers' more negative assessments across all ... components."
Inflation and ECB Policy Response
INFLATION SOARS BUT ECB ON HOLD FOR NOW
Selling price expectations meanwhile soared, after an already steep increase in the previous month, indicating that firms anticipate continued acceleration in overall inflation given high energy costs and possible supply shortages.
"April’s EC survey suggests the Iran war may hit euro zone activity a bit harder than we are forecasting," Franziska Palmas at Capital Economics said. "Services firms' selling price expectations rose further but not enough for the ECB to take action at its meeting tomorrow."
Consumer Confidence and Financial Outlook
The drop in consumer confidence was driven by a deterioration in consumers' views on their households' past and future financial situation, their intentions to make major purchases, and their expectations about the general economic outlook, the Commission said.
Upcoming Inflation Data and ECB Decisions
Euro zone inflation data, due on Thursday, is expected to show an increase to 2.9% this month from 2.6% in March and regional data from Spain and several key German states on Wednesday appear consistent with this projection.
This figure is not high enough for the ECB to raise interest rates on Thursday but will put the bank on high alert and policymakers are likely to keep a June rate hike squarely on the table.
Lending Growth and Future Outlook
In a modestly hopeful sign for economic growth, separate data showed that credit growth to businesses accelerated to 3.2% in March month from 3.0% a month earlier, despite banks warning that credit growth is likely to fall off a cliff given the war.
Still, lending volumes are likely to fall in subsequent months and credit standards will tighten, given increased funding costs and uncertainty.
Lending is also seen taking a hit as inflation is accelerating on higher energy costs, quickly hitting corporate margins and households' disposable incomes.
(Reporting by Balazs Koranyi; Editing by Ros Russell and Toby Chopra)
