Eurozone economic sentiment in surprise rise

EUROZONE economic sentiment rose unexpectedly this month and consumer inflation expectations eased, data showed yesterday, pointing to continued economic recovery.

A monthly European Commission survey showed sentiment in the 16-country currency area rose to 103.2 points from August’s upwardly revised 102.3. Analysts polled by Reuters had expected the index to drop to 101.2. “A lot of the second quarter momentum has been carried over into the third quarter. The recovery seems to be broadening not only in several countries, but also across the eurozone,” said ING analyst Carsten Brzeski.

The eurozone economy grew 1.0% in the second quarter, but economists expect growth to falter in the second half of the year as domestic demand wanes, dented by the austerity drive to ward off a sovereign debt crisis. External demand is aalso likely to be hit by falling demand for foreign goods in China and the United States. Analysts said growth would become self-sustaining for longer only if consumers start spending more, but the data showed sentiment among consumers was steady at -11 in September.

“Even now, it (economic sentiment) points to annual eurozone GDP growth of about 2%, which would be consistent with a quarterly gain of about 0.4% in Q3 – much weaker than Q2’s 1.0%,” said Jennifer Mckeown, economic analyst at Capital Economics.

The survey also showed growing reluctance among consumers to start spending more, despite the unchanged sentiment, as the index measuring consumers’ willingness to make major purchases over the next 12 months fell to an all-time low of -26 in September from -23 in August. Consumers also became more pessimistic about employment in the next 12 months, did not expect their savings or financial situation to change and were more gloomy on the economic situation.

The survey also showed consumer inflation expectations continued to be contained, which is likely to boost expectations the European Central Bank will keep its interest rate at a historic low of 1.0% well into 2011. The ECB watches inflation expectations closely in its policy decisions, aiming to anchor them at its price stability target of inflation just below 2% over the medium term.

Separately, the Commission said its business climate indicator, which points to the phase of the economic cycle, rose in September to 0.77 from an upwardly revised 0.72 in August, defying analysts’ expectations of a fall to 0.58.