Business sentiment in euro area drops as political risk deepens

The latest Markit Business Outlook survey showed that sentiment amongst Eurozone business has dropped to the lowest since the end of 2014. The survey was carried out in the month of June, with most of the responses taken before the UK’s referendum of EU membership.

The survey indicated that the ratio of respondents anticipating their business activity levels to rise in the coming year surpassed the ones forecasting a decline by 31 percent. However, that is lower than the 37 percent earlier in the year and the lowest since October 2014, stated Markit.

Optimism diminished in all the four major member nations of the euro area. France posted the lowest degree of sentiment in the outlook again, whereas companies in Spain were more optimistic. On a positive note, expansion plans continued to be unchanged as compared to a year earlier.

The number of firms anticipating to increase capital expenditures surpassed the ones planning to decline by 11 percent, same as the earlier net balance witnessed in February.

Meanwhile, the ratio of firms intending to employ additional staff exceeded the ones anticipating a decline by 16 percent, just marginally down from 18 percent in February. On the other hand, companies were less upbeat regarding future profits declining, given the employment and capex intentions holding up and expectations of future activity declining, noted Markit.

The growth of capacity hinted by the strong hiring and capex numbers bodes well for the sustainability of the euro area’s economic rebound. But the surveys also emphasized broad based concerns regarding increasing political risks in the coming year that pose a considerable risk on the downside to the growth outlook.

UK exiting the EU was, by far, the most widely noted risk to the business growth in the coming year throughout the euro area nations. This is a source of instability that also resulted in optimism to drop to a four-year low in the UK Business Outlook Survey, stated Markit. But the political uncertainty extended beyond Brexit.

Broad-based worries regarding political stability in Germany, Italy, France and particularly Spain were clear in the responses in the survey. Also, concerns about the US presidential election outcome were also common, according to Markit.