Euro-Zone Data Show Rough Path Lies Ahead

The Wall Journal

By ALEX BRITTAIN And TOM FAIRLESS

LONDON—A slump in German business confidence and an unexpected fall in euro-zone factory orders marked the latest in a string of forward-looking data to suggest the currency bloc's economy is losing momentum.

Germany's Ifo research institute said Wednesday that business confidence in the euro zone's largest economy struck a 14-month low reading in August, as German firms scaled back their expectations for exports amid global market turbulence.

The decline in the index was the biggest since just after the collapse of investment bank Lehman Brothers in late 2008.

Ifo economist Klaus Abberger said the drop marks a "turning point" and significantly heightens the risk that Germany's economy could fall back into contraction.

Greg Fuzesi, economist at J.P. Morgan Chase, said the risks have now increased of "a sharper downshift in business and consumer behavior" in Germany. "This could then hit output developments in the coming weeks and months," he said.

A spokesman for German Chancellor Angela Merkel said there are no signs of recession in Germany yet. Steffen Seibert said Wednesday that growth at the end of the year will likely be considerably better than the government had believed at the onset of the year. The government in April had forecast gross domestic product in Germany to expand by 2.6% this year.

A fall in new orders in the euro-zone gave another downbeat indicator on the 17-nation economy as a whole. The official statistics agency Eurostat said new orders fell in June, suffering their biggest monthly drop since September last year.

Orders fell 0.7% in June from May, slowing their annual rise to 11.1% from May's 13.8%.

Confidence among Belgian business executives also fell in August, for the fifth straight month, to a balance of minus 7.8 from minus 2.5 in July. The balance is the difference between positive and negative responses on business sentiment.

The survey of around 4,500 business leaders is a good indicator of the health of the euro zone because, although Belgium's economy is very small, it exports around three-quarters of its output—meaning its companies are very sensitive to developments in other countries, particularly those that share the euro.

The 17-nation currency bloc's economy grew just 0.2% in the second quarter, slowing from 0.8% growth in the first three months of the year. Germany shuddered to a near-standstill with growth of 0.1%, after a 1.3% rise in the first quarter.

Wednesday's data come on the heels of similarly dour readings on Germany and the wider euro-zone economy in recent days. The ZEW forecasting group Tuesday reported a huge fall in its economic expectations index for Germany in August. A survey of purchasing managers by data company Markit Economics showed business activity flat-lined in the euro zone—and was particularly weak in Germany, where it slowed to its weakest growth rate in more than two years.

Meanwhile, figures released by the European Commission Tuesday also showed the mood among euro-zone consumers deteriorated far more than expected in August, marking its lowest reading since June 2010.

The European Central Bank has factored some economic weakness into its plans, saying earlier in August it expected only moderate growth in the coming months.

But signs of a pronounced slowdown are likely to raise pressure on the bank to halt or even reverse its recent series of rate increases.

The bank lifted its key interest rate by a quarter point in April and again in July, to 1.50%, citing upward pressures on inflation. Other major central banks including the U.S. Federal Reserve have given no sign that they plan to exit their ultra-loose monetary policy stance any time soon.

—Michelle Abrego, Beate Preuschoff and Riva Froymovich contributed to this article