European Sentiment Worsens Less Than Feared as Companies Bolster Cash Cushions

© Reuters.

By Geoffrey Smith 

Investing.com -- Economic sentiment in the Eurozone held up better than feared in June, as companies managed to bolster their cash cushions to get them through tougher times ahead.

Eurostat said that the main index of its Eurozone business and consumer sentiment survey edged down to 104.0 in the month, from 105.0 in June, better than expectations for a bigger drop to 103.0. That was due to a modest improvement in sentiment among both industry and services. The consumer confidence index, by contrast, remained stuck deep in negative territory at -23.6.

The figures reflect an ongoing crisis of confidence due to surging inflation and fear of higher interest rates from the European Central Bank to tame it. The ECB has said it's likely to raise rates for the first time in a decade at its meeting next month, and then again at its September meeting, even though the economy is slowing sharply as a result of Russia's invasion of Ukraine.

For now, however, businesses are still finding it easy to bolster their defenses. Data released earlier on Wednesday by the ECB showed lending to companies grew at an annual rate of 5.8% in May, its fastest in over a year, as corporates locked in low long-term borrowing conditions before the anticipated rate hikes. The ECB's unusually clear guidance about its intentions appears to have helped eased fears of inflation, meanwhile: Eurostat's survey said inflation expectations had fallen to their lowest in four months in its survey.

Confidence across the European economy has taken a battering this year from Russia's invasion of Ukraine, which caused unprecedented rises in prices for energy that have stoked broader inflation. 

The conflict looks more and more like developing into a lengthy test of strength between the Kremlin and the West. At a NATO summit in the Spanish capital of Madrid on Wednesday, the U.S. announced it will establish a base for its 5th Army in Poland, and deploy more F-35 squadrons and naval assets to Europe in response to what the alliance called a "direct threat" to peace from Russia.

Those measures come two days after missiles launched by Russian warplanes struck a shopping mall in the city of Kremenchuk with at least 1,000 civilians inside.