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French and German business confidence has fallen sharply, boosting the chances of a fresh interest rate cut by the European Central Bank in September amid signs the Eurozone’s two largest economies are set for a downturn.
German two-year bond yields fell 0.04 percentage points to a five-month low of 2.67 per cent on Thursday, as traders increased their bets the ECB would respond to signs of a weakening economy by lowering interest rates at its next meeting on September 12. They later rose back to 2.7 per cent after the publication of strong US growth figures.
The move came after the French statistics agency Insee said on Thursday that its measure of confidence among French business leaders had fallen from 99 to 94, its lowest level for more than three years.
“These data suggest that the French economy is sliding into recession, just as we thought the economy is entering a period of decent growth, boosted in part by the Summer Olympics,” said Pantheon Macroeconomics economist Claus Vistesen.
Separately, the Ifo Institute in Munich said its closely watched index of German business confidence had dropped from 88.6 to 87 — its lowest level since February — defying economists’ forecasts for a rise to 88.9.
“Scepticism regarding the coming months has increased considerably,” said Ifo president Clemens Fuest. “The German economy is stuck in crisis.”
Analysts attributed the unexpectedly gloomy reading to the recent French parliamentary elections, which raised concerns among business leaders about a shift in support to far-right and leftwing parties and left politicians struggling to form a new government.
“The business climate in France has deteriorated strongly compared to June”, said Insee on Thursday, adding that “all market sectors have contributed to this degradation”.
JPMorgan economist Greg Fuzesi said the downward shift in French business sentiment “reflects uncertainty linked to recent political developments”.
In Germany, economists attributed the negative shift to a weaker global economic outlook and geopolitical uncertainty, as well as the lingering impact of the recent surge in inflation on consumer spending and investment.
Commerzbank chief economist Jörg Krämer said the survey results were “another cold shower for economic optimists”. ING economist Carsten Brzeski said: “Weak industrial orders, high inventory levels and precautionary savings are still weighing on the economy.”
The downbeat data came a day after a survey of purchasing managers published by S&P Global indicated a sharp slowdown in business activity in Germany and France, particularly among manufacturers. The composite PMI reading for the Eurozone fell 0.8 points to a five-month low of 50.1, barely above the 50 mark that separates growth from contraction.
The Eurozone economy stagnated for much of last year but showed signs of recovering with quarterly growth of 0.3 per cent in the first three months of this year. However, economists expect second-quarter gross domestic product figures due next week will point to a slowdown.
There was a more upbeat signal from a rise in bank lending to Eurozone businesses in June. The ECB said on Thursday that lending to non-financial companies increased €19bn in June, up from €4bn in May and its biggest rise since October 2022.
But economists said this was unlikely to signal higher investment as almost all the growth was in short-term loans of up to a year. “Longer-maturity loans, which are typically associated with longer-term investment, contracted for a second consecutive month,” said Riccardo Marcelli Fabiani at Oxford Economics.
Additional reporting by Mary McDougall in London
