Business Confidence in the Euro Area Falls in July but Is Still Healthy

A number of Euro Area countries have reported wavering business confidence in July. Today, France's INSEE (Institute National de la Statistiques et des Etudes Economiques) released its measure of business confidence for the area as a whole. The measure declined in July to 112 from 113 in June and is below the recent peak of 114 last seen in September, 2006. Confidence, however, appears to be plateauing rather than declining sharply as at previous peaks, as can be seen in the first chart.

One of the reasons that might explain the fact that business confidence in the Euro Area has not gone off the cliff is that such factors as the slowdown in the U. S. and the rise in the Euro, which would ordinarily weaken confidence, have been offset by the rise in the demand for European exports from Asia. The second chart shows the Euro Area exports to Asia and to the U. S. In addition, as we noted yesterday German manufacturing orders from other Euro Area countries have recently risen sharply. This suggests that intra Euro Area activity, which is not affected by changes in the euro, is increasing.

Note: The European Business Confidence measure is based on six balance of opinion indicators: production over the past three months, production forecast for the next three months, inventories, order books, foreign order book and selling price expectations. The data are gathered from surveys in France, Germany, Italy, Spain, the Netherlands and Belgium. These six countries account for about 90% of the total Euro Area's GDP. The measure is conducted so that its average is 100 and has a standard deviation of 10..