Widely followed gauges of eurozone business sentiment published on Tuesday provided further evidence that economic momentum in the core eurozone has peaked.
Germany’s Ifo business climate index declined for the fifth consecutive month, disappointing consensus estimates.
Separate surveys on business confidence from France and Italy painted a similar picture.
Against this backdrop, the euro is starting to look quite fragile.
Germany’s Ifo business confidence gauge declined to 102.1 points in April from 103.3 points in March, behind economists’ consensus forecasts for a reading of 102.6 points.
The outcome heightened speculation that the German government would lower its economic growth forecast for 2018 later this week, from 2.4% down to 2.3%.
Ifo chief economist Clemens Fuest hailed the economic research bureau’s latest survey as concrete evidence the German economy was slowing down.
“High spirits among German businesses have evaporated,” said Fuest.
Ifo claimed its latest survey data was consistent with German economic growth of 0.4% over the first quarter.
While this is a marked slowdown from the 0.6% stellar performance notched up by the German economy in the fourth quarter of 2017, Ifo stressed the latest quarter’s performance was more a case of “normalisation” rather than cause for alarm.
Nevertheless, it is the exporters, the lifeblood of the German economy, who face the headwinds from the euro’s significant appreciation during 2017.
More recently, confidence has also been hit by Trump’s imposition of tariffs on US imports.
Against this backdrop, the latest Ifo survey showed expectations in the German manufacturing sector had dropped to their lowest level since August 2016.
Within manufacturing, the survey also found that capacity utilisation had fallen by 0.3% points to 87.7%, though Ifo also claimed that many German firms were facing a shortage of workers.
Despite the fall, capacity utilisation remains well above the long-term average of 83.6%.
The business climate index also fell sharply in Germany’s service sector, as optimism declined, as it did in wholesale and retail trade.
Construction was the exception, however, where the business climate index hit a new record high.
Meanwhile, survey data on the German economy released earlier in the week by IHS Markit was mixed.
On the plus side, the flash composite Purchasing Managers’ Index (PMI), which gauges activity within both the manufacturing and services sectors, rose to 55.3 in April, its highest level in two-months and ahead of expectations. The reading had declined to an eight-month low in March.
Nevertheless, Markit’s survey also suggested that growth in new orders had fallen to an 18-month low.
This apparent deterioration in the outlook supports the findings of Tuesday’s Ifo survey and helps explain the overall decline in confidence.
For the eurozone as a whole, the flash PMI for April was unchanged from the reading of 55.2 registered for March, which itself was a 14-month low.
Nevertheless, the result was ahead of economists’ consensus expectations for a decline in the gauge to 54.9.
In common with Germany, however, confidence in France’s manufacturing sector has also been hit, suggesting a general weakening in business conditions across the eurozone is on the horizon.
Survey data released on Tuesday showed France’s manufacturing sentiment index fell to 109 in April from 110 in March.
Elsewhere, data also showed that Italy’s manufacturing confidence index had eased to 107.7 in April, the lowest reading since May 2017, amid a deterioration in order books.
On the whole, the outlook for the euro is currently looking decidedly bearish, especially given its sharp rally during 2017.
From the beginning of 2016 up to the end of January this year, the euro gained 18% against the dollar, to stand at $1.24. However, since then the euro has fallen slightly to $1.22.
Given the apparent weakening in the outlook for the eurozone economy, a further fall in the euro is likely, particularly as the Federal Reserve (Fed) and the European Central Bank (ECB) appear to be increasingly diverging in their monetary policy.
This year, global markets have been roiled by rising US inflation and worries over more interest hikes from the Fed, which raised rates yet again at its March meeting.
In contrast, as eurozone inflation has eased this year, the ECB looks some distance away from being able to start normalising its own monetary policy and begin rate tightening.
The recent weaker trend in eurozone economic data, together with softening inflation numbers, makes it highly plausible the ECB could announce another extension to the current round of quantitative easing that is scheduled to end in September.