As voters across the European Union head to the polls to vote for a new European Parliament, businesses have mixed feelings about what is in store for them.
While recent EU-wide polls suggest that voters are less concerned about the EU’s economic situation than at the time of the last elections, economists have been more pessimistic about the trading bloc’s economic prospects.
Back in March, the European Central Bank followed the lead of the OECD and IMF and slashed its 2019 growth forecast for the region from 1.7% to 1.1% in face of uncertainties ranging from geopolitical risks to trade wars. This pessimism has also been shared by European business leaders for some time, if business confidence indicators across the region are to be believed.
Declining Business Confidence in the Eurozone …
Referring to a decline in its Business Climate Indicator in April 2019, the European Commission noted in a press release that “Managers' views of the past production, their production expectations, and their assessments of overall order books and the stocks of finished products declined significantly”, although “there was some relief in the appraisals of export order books”.
(Business Climate Indicator for the Eurozone, Source: European Commission Services)
In Germany, Europe’s largest economy, the closely watched KfW-ifo SME Barometer, which is based on a monthly survey of German businesses, points at a downward trajectory in business sentiment among small and medium-sized enterprises (SMEs) since the last quarter of 2018. This trend has been particularly pronounced in export-oriented sectors.
Alina Azanbayev and Klaus Borger from the German KfW bank’s research department remarked that large companies “have been even more pessimistic than SMEs already since the summer of last year.” They single out the renewed postponement of the UK’s exit from the EU as the main reason for dampening business sentiments in April, adding that expectations have been stagnant as businesses have been nervous “in light of the ongoing risks to the business cycle”.
The business climate is similarly jittery in France, the Eurozone’s second biggest economy, where business confidence in the country’s manufacturing sector in April unexpectedly fell to its lowest level in almost four years and only improved again this month. This improvement compensated for a fall in confidence in the retail trade and services.
...and Elsewhere in the EU
The situation is not much different in EU countries outside the Eurozone. In the UK, the EU’s second largest economy, the BDO optimism index shows that business confidence has fallen to the lowest point since 2012 and the British economy is only growing as a result of stockpiling ahead of Brexit. In the British case, there has also been a marked decline in confidence in the service sector.
In Eastern and Central European countries business confidence is worsening, too, although economic growth remains strong in most states in the region with 4.3% year-on-year in the first quarter of the year.
Liam Carson, Emerging Europe economist at Capital Economics, told 7Dnews: “it appears that ongoing economic weakness in Germany - the region's key trading partner - and the euro-zone more generally is starting to weigh on sentiment in export-led manufacturing sectors. Business surveys, such as the European Commission Economic Sentiment Indicators and the Markit Manufacturing PMI, have fallen markedly in recent quarters.”
With the notable exception of the construction sector, Carson further commented, “there are signs that this is starting to affect business confidence in other sectors too. Given that the CEE economies are all highly open, consumer-facing businesses appear to be anticipating that weak external demand will eventually filter through into softer domestic demand.
Is Business Pessimism Justified Considering Relatively Healthy Economic Indicators?
Despite declining business confidence, the economic growth forecast for the EU remains positive, albeit lower than previously expected. Moreover, unemployment has been declining continuously and workers in a number of member countries have been benefiting from sustained wage increases. Referring again to Central and Eastern Europe, Carson remarked that “so far, at least, there is little sign that the deterioration in business confidence is feeding through into weaker economic activity.” However, he conceded that “it seems inevitable that the activity data will worsen.”
With the Chinese economy expected to slow to a three-decade low this year, a trade war with the US looming and a disorderly Brexit remaining a real possibility, it is indeed highly uncertain whether growth can be maintained. As the EU’s export sector will be most affected by such developments, the hope remains that the continued strength of the domestic economy will dampen the impact of external shocks.