FRANKFURT (MNI) – News of a weaker-than-expected Ifo index and
slumping Eurozone industrial orders figures will add to concerns about
the region’s economic recovery and its ability to grow out of the debt
crisis.

The latest data is also likely to feed expectations of a downward
revision to ECB staff forecasts, which should keep the European Central
Bank’s interest rates on hold, at least, over the coming months.

August’s Ifo sentiment index dropped more than expected to hit its
lowest level since June 2010. While both the current conditions and the
six-month outlook fared worse, the sharp drop of expectations — the
second biggest on record after the one in July 2008 — is particularly
alarming.

On Tuesday, Germany’s ZEW investor climate indicator also
disappointed expectations. Financial market investors’ expectations for
the next six months hit the lowest level since December 2008, the data
showed.

Further deterioration of leading indicators follow a dramatic
slowdown of GDP growth to just 0.1% in the second quarter from +1.3% in
the first and intensifies worries that the Eurozone’s growth engine may
be running out of steam.

That notion was bolstered by Wednesday’s report on June Eurozone
industry orders, which surprised on the downside despite a strong boost
from demand for heavy transport. New orders contracted by 0.7% m/m,
disappointing expectations of a 0.4% rise.

Worse may yet lie ahead for Eurozone industry, leading indicators
suggest.

Belgian business sentiment, also released Wednesday, showed the
manufacturing sector index is now below the long-term average of -10.7
and at its lowest level in 22 months. The euro area’s flash PMI for
manufacturing fell to 49.7 points in August, dropping below the 50-point
threshold — and thus no longer in expansion territory — for the first
time since September 2009.

The August services PMI declined to 51.5 from 51.6 in July and the
composite PMI was static at 51.1. While the stable reading surprised on
the upside and shows ongoing expansion, growth has nonethelesss slowed
to its lowest pace since September 2009.

The Eurozone’s sovereign debt troubles and recent economic slowdown
have also taken a toll on consumer confidence. According to a flash
estimate of the European Commission released on Tuesday, consumer
confidence in the euro area dropped from minus 11.2 in July to minus
16.6 in August — one of the sharpest drops on record.

The latest slew of weak economic data raises the odds that the
European Central Bank’s staff forecasts, to be released next month, will
see another downward revision to the 2012 growth forecast from the 1.7%
forecast published in June, which was revised from 1.8% in March.

Even before the latest releases, Governing Council member Yves
Mersch said in August 11 that he “would not exclude that the latest
indicators might play a role in our next round of staff projections.”

Weakening growth prospects will make it harder for the region to
grow its way out of the crisis. What is more, weakening economic
conditions in the core countries such as Germany could further weaken
their resolve to offer financial support to the troubled periphery.

In conjunction with easing price pressures and promises by the
Federal Reserve of near-zero interest rates until at least mid-2013, any
ECB tightening moves seem increasingly further off.

–Frankfurt newsroom +49 69 72 01 42; Email: jtreeck@marketnews.com

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