Source:E.C.

2 AUGUST 2011

Concerns over debt contagion in the Euro area and consequently in the EU 27 hammered the Economic Sentiment Indicator (ESI) in July following Credit rating Agencies (CRAs) downgrade, and successively of Greece, Ireland, and Portugal amid the US debt ceiling impasse and August 2nd deadline. Italy's and debt Spain's arched over the EuroGroup's lack of immediate response to Greece's second call for a new bail-out while trading markets experienced black Monday and black Tuesday by mid-month in one week.

In the Euro area, economic confidence shed over two points to 103.2 and similarly in the EU 27 to 102.4 as industrialists' perception of the current context varied widely. France's index shed half a point to 106.9 despite the country's financial institutions exposure to the Greek debt, the largest among European banks, as industrial momentum kept abreast of political uncertainties. Germany's ESI dropped two points to 112.7 as the country's export-led market proved penalized by the Euro's constant high against foreign currencies while simultaneously the global slow down dented its market. In Italy, the area's third economic weight behind Germany and France, confidence fell four and a half point as the latest austerity program ((€ 47 billion spending cut) heralded dire times for many industrialists. Spain's index fared equally due to the country's debt, a constant concern among CRAs, taking the index to drop three points to 93.  

East European member states stayed cool-headed despite such turbulent and global context as respective ESIs in the region stayed mostly unchanged including in the Czech Republic, a major automobile industry partner for the west European auto market. Latvia, Lithuania, Poland, Romania fared equally unlike Slovakia, a Euro area member state where assurance decreased by two points. Among Nordic states, Finland and Sweden stayed in positive territory while Denmark shed several points.

Industrial confidence declined sharply among most countries and despite commodities recent price declines as the lack of demand wiped out any jump-start among businesses. In the Euro area, the index fell over two points to 1.1 and in the EU 27 nearly three points to 0.9. France's index dropped equally to 2.5 points while Germany's fell a lesser two points to 9.6 points.  Italy and Spain recorded the biggest index drops due to concerns over their respective public debts taking their gauges further into negative territory, to -4.5 points and to -13.3. The UK's index also fell into the red and to -2.2 points as the last day of June saw the biggest public sector demonstration against upcoming job cuts (over 500 000 planned) as well as students' discontent  over universities fees.

In Latvia and Lithuania, the index kept climbing, while the Czech Republic, Poland, and Slovakia  remained in a stable environment.
Romania solely shed half a point and mirrored its counterparts mood.  

However, production expectations dipped equally in the Euro area, a two point drop to 10, and in the EU 27, to 10.8 points. Germany's index shed the most points and  sent its index down three points to 11.5 while France more import-led economy led its index to fall under half a point to 16.6. Italy's index fell one point to 9.8 but Spain's worsened and fell over three points to -5.7 In the UK, industrial confidence fell nearly two points to  10.6, a rather bold mood due to the country's first export market, the USA, and the country's exposure to US Long-term Treasury Securities, 8% or the third US debt owner , according to the US Treasury data http://www.fms.treas.gov/bulletin/b2011_2ofs.doc
 
Expectations for east European member states performed inversely to their western neighbors as lower commodity prices allowed for an order books revival. In Romania, the index stayed sustained and stood at 7.3 for the second consecutive month, equally in Latvia a two-point rise to 12.1, Lithuania, up almost four points to 23.7 and Slovakia to 4.1 points (from -7.1). The Czech Republic's index remained an exception as the index fell two points to 10.2.

Order books revealed the degree to which industrialists anticipated on dire times due to the volatile economic context. France's index plunged to -8.4 points (from -0.4), Italy's dropped to -21.8 (from -17.7) while Spain's deteriorated further to -21.1 points. Germany's index rescinded two points to 14.5 but failed to keep the region's overall index afloat, a three point drop, to -4.7. The EU 27 index shed half its previous month value to -6 points.

Among east European member states, the index in Poland fell two points to -43.5,  while the Czech Republic's gained three points to 2.8 as demand for automobiles, one of the country's major manufacturing activity, picked up in the west. In Latvia and Lithuania, order books indices also climbed two points each unlike Slovakia where the index fell three points. Nordic member states performed unevenly: Finland's Euro area specific sent the country's index to plunge to -11.3 points (from -0.4)  while Sweden's fell two points to -5.1 In Denmark, the index jumped over ten points to 13.1

Competitiveness among industrialists for market shares left little room for stock depletions. Stocks of finished products thus rose substantially throughout the Union, up over two points to 4 due to replenishing ahead of next semester while the Euro area's proved less buoyant with its index up to 1.8 (from 0.1) due to a tangible slow down in the making since the beginning of the second quarter.  France's index moved down to 0.8 amid the Summer sales period, a positive sign for the upcoming months, while Germany's rose to -2.9, a two point rise, for inventory building. In Italy, stock levels also grew, up to 1.3 points to 0.7 and Spain's shot up to 12.9 points (from 5.3). The UK's followed a similar patter as its stock levels rose to 12.4 from 5.5.

Nordic states stock levels also rose significantly, a reliable barometer for an economic V shaped pick up in each western and eastern Europe.  Sweden's index jumped to 18.3 (from 5.3) and proved sustained followed by Denmark's to 13.4 (from 8.6) while Finland‘s more subdued 8.3 points (8.9 the previous month) proved strong although prudent, as a Euro area country.

In Slovakia, Poland, and Romania, east Europe's economic leaders, order books climbed equally to their major western partners.

However, production trends in recent months confirmed slower activities as export order books rescinded overwhelmingly. The EU 27 index moved back to -5.5 points (from -3.9) and the Euro area's by half to -4.3 points. France's index turned negative to -4.8 points, Italy's deteriorated and stuck to -17.1 points for the second consecutive month while Spain's worsened and shed two points to -16.3. Germany's one point drop to 9.1 points translated the country's export reliant economy.
In the UK, the index performed similarly to the Euro area's three and fell to -5.6 a two-point dip.

Denmark proved the exception as the index leaped 12 points while Sweden's rose one point and Finland's inversely. Poland, Slovakia and Romania all recorded declines, not substantial enough, on average two points, to declare contagion of any kind.

In this context, employment expectations in the EU 27 and the Euro area fell back as most member states acknowledged difficult times on top of uncertainties. As for other gauges, eastern Europe stayed positive with their respective indices on the rise and substantially. Poland, the Czech Republic, Latvia, Lithuania, and Romania all projected demand for manpower. Denmark's index, in relation with its order books index leap, also foresee more dynamic labor markets along with Sweden but unlike Finland. Spain's index, shed two points to -10.5, a fatalistic but realistic  representation due to the country's record high 21% unemployment (June figures according to Eurostat) among which  45.7% youth are jobless on top of the « indignados » the outraged movement initiated by university educated young adults chronically underpaid and under employed.        

Thanks to commodities recent declines from April and up to June, selling price expectations dipped further. The Euro area's fell over four points to 12.5 and in the EU 27 a more competitive six and half points to 11.5. 

France's index dropped over ten points to 16.6, while Germany's shed two points to 15.4 followed by Italy's three point cut to 9.8 and Spain's two point decline to 5.1 In the UK the index was pushed down by 17 points to 11.4 as the GBP devaluation along with lower raw materials prices benefited fully to the country's industrialists competitive edge.