Eurozone Economic Confidence Weakens in July Amid Trade Tensions

The European Commission (EC) has found that economic sentiment across the single-currency bloc worsened slightly this outgoing month as both businesses and consumers are concerned with the global trade tensions and a lack of domestic inflation.

Kristian Rouz — Economic sentiment in the Eurozone dropped this outgoing month due to mounting concerns over disruptions in international trade, the bloc's reliance on manufacturing exports, as well as a dampened mood in manufacturing and retail.

This comes as the European Central Bank (ECB) is weighing a gradual removal of its unconventional stimulus, adding to the brewing pessimism.

A new report from the European Commission (EC) found the overall economic confidence across the 19 Eurozone member-states decreased to 112.1 points in July, compared to 112.3 the previous month. This latest development comes as a further extension of the downward trend since the bloc's economic sentiment peaked at 115.2 in December 2017.

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A separate report from the ECB confirmed a mild decrease in broader economic conditions in the single-currency area.

"While the incoming data had been somewhat weaker than previously expected, the fundamentals remained in place for the medium-term growth outlook to remain solid and broad-based," the ECB's governing council said in a statement.

Additionally, yet another report from the IHS Market found the Eurozone's headline Purchasing Managers' Index (PMI), which reflects developments in overall private-sector activity, slid to 54.3 in July from 54.9 the previous month.

Although readings above 50 indicate expansion, a gradual cooling of the bloc's economy may be seen as alarming against the backdrop of an acceleration in global GDP growth.

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IHS Market also suggested if current macroeconomic conditions in the Eurozone are sustained for two consecutive months, the bloc's GDP growth could ease to 0.4 percent quarter-on-quarter from the current projections of 0.5-percent expansion.

The European Commission's separate indicator, a measure of business climate, dropped to 1.29 this outgoing month from 1.38 in June — and also sliding from a peak of 1.63 posted back in January.

The Commission found the majority of Eurozone private-sector enterprises are concerned with the trade tensions between the EU and the US. Despite US President Donald Trump and EC President Jean-Claude Juncker reaching a framework understanding on trade last week, the sentiment remains subdued in July — but could improve in August.

"Managers' assessment of past production improved while their views on export order books worsened," the Commission's report read.

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Nonetheless, the EC report found a mild improvement in business sentiment in the services sector, which is currently capitalizing on the tourist influx during the summer holiday season. Services sector confidence firmed to 15.3 in July from 14.4 last month, but overall consumer sentiment is still negative, at —0.6 — yet, above its longer-term average of —12.2.

Services are driving more than 70 percent of the Eurozone's GDP, suggesting this improvement is crucial to broader macroeconomic projections.

However, confidence in the retail sector dropped into negative territory to —0.1 from 0.7 in June amidst uncertainty over effective consumer demand, purchasing power and stockpiles. Consumers, meanwhile, are expecting prices for goods to increase in the coming months due to the euro's weakness, and the anticipated disruptions in global trade.

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Inflation expectations index rose to 18.0, which is still below the longer-term average, whilst selling price perceptions dropped to 9.7 in July from 10.1 in the previous month over purchasing power concerns.

The data suggests the Eurozone economy has entered a period of mild turbulence due to the trade spat with the US, coupled with the UK's unwavering intent to split from the EU. These latest developments also might suggest Brussels would be more interested in reaching trade agreements with its most important partners in the months to come.