Confidence in the eurozone falls for two months in a row as austerity bites

Confidence in the eurozone’s economy fell for a second straight month in April and by more than expected as austerity bites, strengthening the case for a cut in interest rates later this week.

An index of executive and consumer sentiment dropped to 88.6 from 90.1 in March, according to the European Commission’s latest Business and Consumer Survey results. That’s the lowest since December. Economists had forecast a decline to 89.3, according to the median of 26 estimates in a Bloomberg News survey.

The disappointing data highlights the euro zone’s difficult road out of recession and the souring of the mood among companies and consumers since March, after an optimistic start to the year.

Pressure for an Interest Rate Cut

Howard Archer, economist at IHS Global Insight says they “intensify the pressure” on the European Central Bank to cut its bank rate from 0.75 percent to 0.5 percent.

“The further and increased slippage in economic sentiment in April reinforces our belief that the ECB is more likely than not to cut interest rates on Thursday. If the ECB does hold fire on interest rates on Thursday, it is very likely only delaying the inevitable.”

The second successive drop in eurozone economic sentiment to a 4 month low in April fuels concern that the single currency area is headed for yet another GDP drop in the second quarter of 2013 after almost certainly suffering a sixth successive drop in the first quarter of 2013.

The drop in sentiment follows on from the purchasing managers reporting that manufacturing and services activity contracted at an appreciable rate in April.

Euro Exchange Rate

However, the euro rose against the US dollar on Monday, lifted by the formation of a government in Italy, but was held in check by the expectations of a interest rate cut by the ECB (European Central Bank).

Meanwhile, senior eurozone officials will meet later today to approve payment of another 2.8 billion euros (2.35 billion pounds) in rescue loans for Greece, on condition that the country’s lawmakers approve a reform law the day before, the country’s finance minister said on Saturday.

This comes after Greece’s parliament approved an emergency bill Sunday to pave the way for thousands of public sector layoffs and free up €8.8 billion ($11.7 billion) in international rescue loans. The bill, which passed in a 168-123 vote, will allow for the first civil service layoffs in more than a century. About 2,000 civil servants will be laid off by the end of May, with another 2,000 following by the end of the year and a further 11,500 by end-2014, for a total of 15,500.

The legislation is the latest wave of Greece’s draconian austerity program. Similar cost cutting programs are having negative effects on Spain Portugal and Italy, three key eurozone member states.

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Confidence in the eurozone falls for two months in a row as austerity bites