Economic sentiment for the Eurozone and its 19 member countries sharing the euro went down in August, pulling the region down to its lowest level since March, as opposed to Britain’s rebound in confidence. The drop is a sign that morale for the member states is weakening after Britain voted to leave the European Union.
The euro zone Economic Sentiment Indicator (ESI) conducted by the European Commission went down 103.5 in August down from 104.5 in July. It is the lowest since March and falling even further below the expectations of 38 economists polled by Reuters who pegged an average of 104.1 with estimates ranging from 103.0 to 104.9.
Four of the Eurozone’s five largest economies suffered a blow in economic confidence, with the exception of France whose index increased in August, albeit slightly.
“While the impact of Brexit on euro zone survey data had been muted so far, businesses have now caught up to a combination of Italian banking problems, the Brexit vote and geopolitical worries,” according to ING economists in a note.
A factor in the economic uncertainty is the U.K’s decision to leave the EU after the referendum vote held on June 23. The terms of the exit, however, are still being negotiated.
The Brexit was compounded on top of Italy’s struggling banking system that is experiencing 360 billion euros in bad loans. Confidence in the country has reached another low for the 18th consecutive month.
The European Central Bank’s is set to meet on Thursday next week and will add the growing concern that is reflected in the recent data to its agenda.
“The general weakness of ESI across the euro zone suggests that more fundamental forces are weighing on growth, such as the fading boost from previous declines in oil prices and the euro exchange rate,” economists at Capital Economics said.
The ECB has been cutting rates to increase inflation rates, even going as far as issuing negative interest rates, along with giving banks free loans and buying 80 billion euros in assets every month. Current efforts so far have not yielded results and continues to fall short of their inflation target of 2 percent, which analysts believe will continue to be elusive for two more years.
Industry managers reported a drop in morale to -4.4 with the assessment of their current order books declining at their sharpest since February 2009.
Managers in the service sector also experienced a drop in confidence to 10.0 as demand expectations fell.
The business climate indicator of the European Commission also fell to a three-year low of 0.02 down from 0.38 from July’s data.
“Managers’ assessments of past production, the level of overall and export order books deteriorated markedly,” the Commission said in a statement.
UK confidence, on the other hand, increased by 1.4 points up to 104, thanks to a strong performance from the service sector.