Eurozone Businesses Unruffled by Greek Crisis

By Paul Hannon 

        Eurozone businesses were untroubled by the threat of a Greek departure from the eurozone in July, becoming more upbeat about their prospects even as consumers grew more wary.
        A European Commission survey released on Thursday recorded a surprising strengthening of confidence across a range of businesses and in most of the major eurozone economies.
        The survey was carried out as Greece edged as close to departure from the currency area as any member has ever reached, before an agreement was secured on July 13 that could pave the way for fresh loans from the rest of the eurozone to the country over a three-year period.
        But despite the prospect of sustained economic growth, the European Central Bank faces a difficult task in lifting inflation toward its target of just under 2%. Figures also released on Thursday showed consumer prices rose very slightly in Germany and Belgium during July, and declined in Spain.
        The pickup in business confidence suggests that a recent rise in investment spending and employment is likely to continue, supporting the currency area's modest economic recovery.
        The commission's headline Economic Sentiment Indicator--which aggregates the business and consumer measures--rose to 104.0 from 103.5, reaching its highest level since July 2011 and remaining well above the average of 100.0 going back to the start of the series in 1990. Economists surveyed by The Wall Street Journal last week had expected a modest decline to 103.3.
        The Commission confirmed that consumer confidence weakened during the month, but manufacturers, service providers and retailers became more upbeat. Construction companies and banks were slightly more downbeat.
        With its future as member of the currency area in doubt and its banks closed, Greek confidence evaporated, with the ESI for the country falling to 81.3 from 90.7. But it was a very different story elsewhere in the eurozone, as sentiment strengthened in Germany, France and Spain.
        The rise in business confidence is consistent with other data that suggest the wider eurozone economy has been little affected by the deterioration in Greece's relationship with fellow eurozone members since the start of the year. The economy grew at the same modest pace in the first quarter as in the final three months of 2014, and most indications point to a continuation of that performance in the second quarter. Figures released earlier on Thursday showed Spain's economy continued to gain momentum in the three months to June, growing by 1% from the previous quarter, its most rapid expansion in seven years.
        Greece accounts for just 2% of total eurozone output, and its trade links with many other parts of the currency area are weaker than its relative size would indicate, so few businesses outside the country have been directly affected by its slide back into contraction this year. Indeed, manufacturers reported a pickup in export orders during July, a sign that businesses have not put their plans on hold to await the outcome of Greece's talks with its creditors.
        A final deal between the Greek government and its creditors faces an array of challenges, including growing skepticism over whether the bailout plan can return Greece's ravaged economy to health.
        Contagion from Greece's financial difficulties have proved much weaker than in previous periods of heightened concern about the durability of the eurozone, as yields on bonds issued by other eurozone governments remained relatively unchanged even as those of Greece soared. That is partly due to the ECB's program of quantitative easing, which was expanded in March to include government bonds.
        Subdued consumer price inflation in Germany is a sign that the bond purchase program has yet to have its desired effect in Europe's largest economy.
        Consumer prices measured according to common European standards, or the HICP, rose 0.3% on the month and the annual inflation rate was steady at 0.1%, in line with economists' forecasts, data from the federal statistics office showed Thursday. Figures for the eurozone as a whole will be released on Friday.
        Economists warn that inflation could remain low for some time to come.
        "The latest drop in commodity prices could push headline inflation both in the eurozone and Germany--at least temporarily--back into negative territory," said Carsten Brzeski, ING Bank's chief economist. "While this is good news for German consumers and their purchasing power, it could motive the ECB to step up its efforts of purchasing government bonds, rather than to reduce them," he added.
        Write to Paul Hannon at paul.hannon@wsj.com
        (END) Dow Jones Newswires

        July 30, 2015 09:09 ET (13:09 GMT)