German, French companies less hopeful over economic recovery

By Francesco Canepa and Maria Martinez

FRANKFURT/BERLIN (Reuters) - Companies in the euro zone's two largest economies are growing more pessimistic, surveys showed on Thursday, raising concerns over the bloc's already sluggish recovery.

The euro zone has struggled to hold on to a post-pandemic economic rebound led by the United States due to issues such as a less generous government investment, a technological deficit and reliance on raw materials from abroad.

The business climate in France and Germany unexpectedly worsened in July and entrepreneurs took a dimmer view of the coming months, the national polls showed, a day after a separate survey pointed to stalling growth in the euro area.

The readings will likely add to doubt over a modest rebound expected in the euro area, which is predicated upon a recovery in real income and stronger exports, and may strengthen a call for further rate cuts by the European Central Bank.

"Are exports picking up? That's definitely not what these surveys are telling us," Dirk Schumacher, an economist at Natixis, said.

"Aside from the cyclical problems there is the lingering question of whether Europe is still making the right products to benefit from global growth."

AUTO MAKERS HOLDING BACK?

Automakers could be reining in investment after an expected take-up in electric vehicles failed to materialise and amid caution over possible fresh U.S. tariffs if former President Donald Trump wins the November election, Schumacher said.

German's Ifo institute said its business climate index, based on a poll of around 9,000 managers, fell for a fourth straight month, undershooting analyst expectations.

"The German economy is stuck in the crisis," said Ifo president Clemens Fuest.

In France, manufactures said demand was weakening, particularly from abroad, and morale in the services sector deteriorated to its worst level since April 2021, according to the country's statistical office Insee.

While Insee did not mention domestic politics, France held snap parliamentary elections earlier this month, which delivered a hung parliament where a leftist group had a relative majority.

"Although the drop (in demand) largely reflects political-related uncertainty, it is just one extra indication that the economy is still fragile," Oxford Economics' Riccardo Marcelli Fabiani said.

European shares hit their lowest in more than two months on Thursday amid disappointing corporate earnings. Europe's automobile shares lost 2.3%, weighed by an 8% tumble in Stellantis, while the luxury goods sector dropped 2% to a six-month low.

The ECB, which held rates steady last week but is expected to cut them in September, may draw some comfort in data showing wage expectations and labour scarcity easing in the French manufacturing sector, although the picture was more mixed in services.

On the bright side, ECB data showed a moderate rebound in loans to companies, indicating the credit cycle may be starting to turn, thanks to lower interest rates.

"It seems that loan growth is now bottoming out," Peter Vanden Houte, an economist at ING, said. "That said, we’re still far from normality."

(Reporting by Maria Martinez, Writing by Miranda Murray; Editing by Bernadette Baum)