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‘We were too gloomy’: European business leaders are more optimistic

‘We were too gloomy’: European business leaders are more optimistic

The energy crisis triggered by Russia’s invasion of Ukraine, along with high inflation and rising interest rates, have raised fears of an economic slowdown in the euro zone this winter. But Toni Ruiz, managing director of Spanish fashion retailer Mango, said the sales proved the pessimists wrong.

“After months, years of Covid, people wanted pretty, stylish outfits,” Ruiz told the Financial Times. “People were tired of basic clothes. So what we’ve seen is a huge take off.

Across the region, sentiment rebounded. Low unemployment, greater fiscal support from governments, lower energy prices from their August peak and a mild autumn that has kept gas storage facilities replenished. during the summer at a level close to their capacity, have all improved perspectives.

António Simões, head of European affairs at Santander, Spain’s biggest lender, told a conference this week: “I’m concerned like everyone else, but more at the sight of the glass half full.”

Even in Germany, where manufacturers have been hit hard by soaring energy costs caused by reduced supplies from Russia, there are signs of a cautiously more optimistic mood among businesses.

“Output in most industrial and service sectors held up very well despite the energy price shock,” said Klaus Deutsch, head of research, economic and industrial policy at German trade association BDI. . “There’s a big order book, so there’s still work to be done even if demand drops.”

The BDI told the Financial Times that it had been “too somber” and that it was likely that in January it would raise its September forecast for 0.9% growth in the German economy this year. The Ifo Institute’s German business confidence index fell from 84.5 in October to 86.3 in November, while the Munich-based think tank also found that three quarters of companies that use gas in production had reduced their consumption without reducing their production.

Column chart of average GDP estimate (month-over-month percentage point change) showing economists updated their 2022 growth forecasts

Most economists still expect the euro zone to slide into a mild recession – defined as two straight quarters of falling output – and central bankers are warning they will have to raise borrowing costs again in December .

Yet, after a resilient third quarter growth of 0.2% in the 19-country bloc, there are signs that many may have overestimated the slowdown in consumer spending and industrial production due to high inflation and underestimated the boost from the lifting of Covid-19 restrictions.

Retail spending increased by 0.4% in the euro area and the wider EU between August and September, while industrial production increased by 0.9% over the same period, bringing both measures even further above pre-pandemic levels.

Line graph of Eurozone retail sales (2015=100) showing that retail spending in the Eurozone has remained robust

The monthly EU business and household survey, published Tuesday showed that economic sentiment rose more than expected to hit a three-month high. Consumer confidence across the EU rose as people became more willing to make big purchases, while service companies expected higher demand and industry groups grew more optimistic about production expectations.

Members of Germany’s Dax index of blue-chip companies are on track to pay record dividends next spring, according to research published Tuesday by the business newspaper Handelsblatt.

The euro zone’s industrial powerhouse did not emerge unscathed from Russia’s invasion of Ukraine. Output fell in energy-intensive sectors that are particularly exposed to rising gas and electricity prices, such as chemicals, paper and glass. But these sectors account for only 4% of German economic output and many companies have been able to offset the blow with higher prices.

Although Mango’s raw material costs have fallen recently, Ruiz said he expects inflation to remain a problem for the fashion chain for another two or three years, noting that it is experiencing strong increases in staff, rent and electricity costs in its 1,700 stores across Europe.

A leader of a major German group warned that households had yet to feel the full impact of soaring energy costs. He noted that it would take until March 2023 for products made in September, when energy costs were still near record highs, to be purchased by customers.

But even on inflation, there was good news. Consumer price growth appears to have peaked, with inflation falling from a record high of 10.6% in October to 10% in November.

In France, worries about energy prices, heightened during a fuel crisis in October when refinery workers went on strike, have eased slightly. Business leaders have become more optimistic about the outlook for the first time since July, according to a survey of more than 600 business leaders published this week by CCI France, the country’s federation of chambers of commerce.

Healthy order books in construction and other sectors, coupled with reduced bottlenecks in some component supply chains and lower raw material costs for inputs such as steel, fueled the recovery, noted CCI France.

Italy’s industrial trade association Confindustria said output held up well in manufacturing and services, although the construction sector came to a halt. But some of the association’s gloom had simply been postponed until next year. A slowdown induced by “higher interest rates and lower liquidity due to higher utility bills” was likely for 2023.

Others agree that next winter promises to be difficult. “We are seeing signs of gradual improvement,” said Rolf Hellermann, chief financial officer of German publisher Bertelsmann. “[But] Germany’s gas supply and storage build-up may prove more difficult [next year] than in 2022, given the much lower entries from Russia.

Additional reporting by Patricia Nilsson, Sarah White and Silvia Sciorilli Borrelli

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