Eurozone economic sentiment jumps to 28-month high

Background

Crisis-hit EU countries have adopted highly unpopular austerity measures, which in the case of Greece sparked violent street protests (EurActiv 05/05/10).

As speculative attacks on the euro currency continued to rage, other countries soon followed suit. In May, Italy approved austerity measures expected to reduce the budget deficit by 24 billion euros over two years (EurActiv 25/05/10).

Previous EU presidency holder Spain managed to win approval for a 15-billion-euro austerity package on 27 May (EurActiv 28/05/10).

In June, Germany announced a package of budget cuts and taxes worth 80 billion euro aimed at bringing the structural deficit of Europe's biggest economy within EU limits by 2013.

Earlier, the UK, which is outside the euro zone, announced 6.2 billion pounds (seven billion euros) in spending cuts to try and reduce its deficit, which stands at 11.5% of GDP, almost four times the EU limit.

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The European Commission said its economic sentiment indicator for the 16-nation currency area rose to 101.3 in July, a 28-month high, from an upwardly revised 99.0 in June. Economists polled by Reuters expected the index to stay at 99.0.

Economic morale is the latest in a string of indicators that have shown the currency area continues to recover from the worst economic crisis in decades, despite turbulence on its sovereign debt market and uncertainty about the health of banks.

"Only a couple of months ago, we were on a road taking us to the edge of the precipice. Now we are turning to a sustainable path," European Union Monetary Affairs Commissioner Olli Rehn told an economic seminar in Finland.

"Europe's economy has turned to growth and the rise in unemployment has stalled. Growth is slowly strengthening and next year will again be on a more solid base."

Economists warn, however, that growth may falter because of fiscal austerity ordered by many governments to prevent the sovereign debt crisis from spreading from Greece to other countries. Foreign demand for European goods is also expected to diminish.

Martin van Vliet, economist at ING, said: "It [economic sentiment] confirms the spillover effect of the debt crisis to the real economy was limited. But the eurozone economy is bound to lose steam in the second half of the year. For now, let's enjoy it while it lasts."

Uncertain outlook

Howard Archer, chief European economist at IHS Global Insight, noted that the index measuring consumers' willingness to make major purchases over the next 12 months fell, as did the figure showing consumers' willingness to make major purchases at present.

"This raises question marks as to whether improved consumer confidence will translate into significantly higher spending. We have our doubts on this given that the eurozone unemployment rate is currently at a near 12-year high of 10%," he said.

The Commission said economic sentiment improved thanks to an increase in the index for the export-driven industrial sector to -4 from -6 and improvement in services to six from four.

Morale of consumers, whose demand is crucial for making economic growth self-sustaining, rose to -14 from -17.

The increase was driven by strong figures in Germany, the euro zone's biggest economy, where economic sentiment rose to 110.1 from 106.1. The figure also increased in France and Italy, but fell in Spain.

In the wider 27-nation European Union, economic sentiment grew to 102.2 in July from 100.3 in June.

The Commission's separate business climate indicator for the euro zone increased more than expected, rising to 0.66 in July from 0.40 in June. It was the highest reading since March 2008.

It has forecast that the euro zone will register growth of 0.9% this year after gross domestic product contracted 4.1% in 2009.

The Commission survey also showed that eurozone inflation expectations remained muted, reinforcing expectations that the European Central Bank will leave its main interest rate at 1% well into 2011.

Selling price expectations in industry fell to five in July from six in June, while consumers' assessment of price trends over the next 12 months remained unchanged at 11.

(EurActiv with Reuters.)

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