Surprise hike in eurozone confidence

Eurozone economic confidence unexpectedly increased in July, led by industry and construction, even as price growth remained anaemic and geopolitical tensions threatened to undermine the currency bloc’s recovery.

An index of executive and consumer sentiment rose to 102.2 from a revised 102.1 in June, the European Commission in Brussels said yesterday. The median forecast in a Bloomberg News survey of 27 economists was for a drop to 101.9.

“Business and consumer confidence has gradually picked up since the crisis,” said Timo del Carpio, an economist at RBC Capital Markets in London.

“This is positive for growth as it lifts a key drag on investment and consumption decisions.”

The ECB last month introduced an unprecedented range of measures, including a negative deposit rate, to spark price growth and demand.

Yet the conflicts in Ukraine and the Middle East have combined with the lingering legacy of the debt crisis, including high unemployment and weak inflation, to blunt the impact of the ECB’s efforts.

Price stability in the eurozone is threatened “energy and food prices, relative price adjustment in stressed countries, exchange-rate behaviour, weak demand and high unemployment,” ECB president Mario Draghi said on July 9.

“Those threats are real and to cope with them the governing council is determined to keep the monetary policy stance accommodative for an extended period of time.”

Companies’ performance and their business outlook diverge. Berlin-based Zalando, Europe’s largest online-only shoe and fashion retailer, broke into profit in the second quarter and envisions an initial public offering as early as this year.

Meanwhile, Software, Germany’s second-biggest software maker, lowered its full-year forecast this month.

Quarterly euro-area growth will remain flat at 0.3% through the end of this year, according to a separate Bloomberg survey of economists.

Industrial confidence rose to minus 3.8 from minus 4.3 in June and construction sentiment increased to minus 28.2 from minus 31.7, according to today’s report. Sentiment in the services industry fell to 3.6 from 4.4. Consumer confidence was at minus 8.4 in line with a preliminary reading on July 23.

“The economic sentiment index is compatible with growth of at least 0.3% at the beginning of the summer,” said Paolo Mameli, an economist at Intesa Sanpaolo in Milan. “After a slowdown in the second quarter, growth could resume in the third.”

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