May 8th, 2008. Confidence at EU service sector firms dropped further in April, sinking to the lowest level in at least two years as concerns mounted over the international economic outlook and the widening impact from the global credit crunch.
The spring 2008 KPMG Business Outlook Survey, which surveys around 2,800 service sector firms across the EU, found confidence in future business activity, revenues, new business, profits, employment and capital expenditure all sank to new survey lows (the EU Business Outlook Survey for services started in April 2006).
Just under 40% of all EU non-financial service providers reported that the cost of credit has risen since last summer, while just 6% reported that the cost had fallen. Spanish firms were most unanimous in seeing credit costs rise, with 54% reporting an increase from last summer. In the UK, by comparison, just 29% of all companies reported an increase in the cost of credit compared to last summer.
In addition EU non-financial service providers were asked how financial conditions have evolved since the credit crisis began last summer. In relation to the availability of credit, over two-thirds of all respondents reported that the situation was approximately unchanged from that prior to summer 2007. Around 26% reported that availability of credit had deteriorated but, of these, just 4% reported that it was constraining their business as a result.
Although still in positive territory, the headline Business Activity net balance fell to +30.2 from +35.0 last October, while expectations for business revenues dropped to +23.8 (down almost 20 points from last April's series high).
The latest survey indicated that confidence with regard to future business activity dropped most steeply at Irish service providers (down to +23.2 from +48.1 last October) while Spain registered the lowest overall degree of optimism with a net balance of just +15.4. In both cases, the end of prolonged property market bubbles has severely undermined confidence in the wider economy.
Although down on last October, confidence held up much better in France and Italy, while Germany saw a modest firming in sentiment.
EU service providers forecast further rapid inflation of their input costs over the coming twelve months, reflecting the rising cost of wide range of key commodities and also expectations of increasing labour costs. The net balance of +50.9 was up slightly from +50.5 last October and a new survey high. Output charges are set to rise in response, but at a much more subdued rate (net balance of +26.4).
With a much higher proportion (57%) of survey respondents predicting an increase in the pace of cost inflation than forecast a rise in output charge inflation (36%), optimism with regard to EU service sector profits deteriorated further in April. The net balance of just +7.6 firms expecting an improvement in their profits over the coming year was down from +14.7 last October and the lowest in the survey history. Spanish firms were most concerned with regard to the outlook for profits, with a net balance of -20.6 predicting a decline (the only nation to forecast a fall in profits over the next 12 months).
With the outlook for activity, revenues and new business less certain and profits growth set to be restrained by rising costs, EU service providers revised down their forecasts for future growth of employment and capital spending. The employment net balance dropped to +12.2 from +19.0 and capital spending to just +3.7 from +13.3 - meaning both variables registered new series lows. Optimism with regard to future hiring declined across all countries covered, with Spanish firms the least confident (-0.7). Irish firms were most pessimistic with regard to future capital spending (-8.2), followed by the UK (-4.1).
"Today's release adds to the gathering gloom on the outlook for the EU economy, with measures of confidence in future activity, revenues and demand all dropping to the lowest in at least two years at the same time as inflation expectations for costs cling stubbornly to recent survey highs.
"Unsurprisingly, given the predictions for slowing growth and accelerating inflation, forecasts for profits growth have again been aggressively trimmed - leading EU firms to further revise down their plans for investment in both capital and labour.
"At the national level, confidence has deteriorated most sharply in Spain and Ireland - as the abrupt end to the prolonged property market booms in these nations has severely shaken sentiment in the wider economic outlook. Optimism also dropped back in the UK, as concerns over the impact of the credit crunch intensified, but Germany saw a slight firming in sentiment from last October's low.
"The latest findings therefore highlight the continuing dilemma likely to be faced by the ECB and Bank of England over the coming year as they seek to balance downside risks to growth with upside inflation risks."
Luke Thompson
Senior Economist
NTC Economics
T +44 1491 418626
Mobile +44 7738 123574
Claire Le Masurier
KPMG
PR Manager
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Notes to editors:
* Data from the KPMG EU Service Sector Business Outlook Survey were first collected in April 2006.
The Business Outlook Survey for European services is produced by NTC Economics for KPMG and is based on a survey of around 2,800 service sector firms that are asked to give their thoughts on future business conditions. The Survey is produced on a biannual basis, with data collected and published each spring and autumn. The current survey is based on responses from around 1,200 services firms.
The countries covered by the survey are the UK, France, Germany, Italy, Ireland and Spain. The service sectors covered by the survey are: Hotels & Restaurants, Transport & Storage, Post & Telecommunications, Financial Intermediation, Renting & Business Activities and 'Other' Services - which primarily covers other personal services. The methodology of the Business Outlook Survey is identical in all countries that NTC Economics operates. The use of a widely recognised and well-regarded methodology ensures harmonisation of data, and allows direct comparisons of business expectations across different countries.
The Business Outlook Survey uses net balances to indicate the degree of future optimism or pessimism for each of the survey variables. These net balances vary between -100 and +100, with a value of 0.0 signalling a neutral outlook for the coming twelve months. Values above 0.0 indicate optimism amongst companies regarding the outlook for the coming twelve months while values below 0.0 indicate pessimism. The net balance figure is calculated by deducting the percentage number of survey respondents expecting a deterioration/decrease in a variable over the next twelve months from the percentage number of survey respondents expecting an improvement/increase.
NTC Economics (http://www.ntceconomics.com) is one of the world's largest specialist providers of business research information, operating business surveys on behalf of blue chip clients. Current research includes continuous surveys providing original data on economic conditions in the UK, Germany, France, Italy, Spain, the Netherlands, Austria, Ireland, Greece, Russia, Poland, the Czech Republic, Japan, China, Hong Kong, India, Brazil and Turkey. NTC surveys are widely used by governments, businesses and financial markets. Purchasing Managers' Index and PMI are trademarks of NTC Economics Ltd.
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