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Eurozone economic sentiment strengthened in November for the eighth month in a row as the economy picks up strongly from recession. Still, the index remains at a very low level indicating that the healthy growth rates in the second half of this year would not possibly continue into 2010.
Economic sentiment for the 16-nation bloc rose to 88.8 in November from 86.1 in October, a monthly survey conducted by European Commission showed Friday. The index stood above the expected level of 88, but remained significantly below its long-term average of 100. The reading for October was downwardly revised from 86.2.
Matching the consensus forecast, sentiment in industry rose 2 points to minus 19, which was the main contributor to the overall improvement. Consumer confidence rose slightly to minus 17 from minus 18 in October. Consumer sentiment also matched economists' expectations.
At the same time, confidence in construction climbed 3 points to minus 26 and that in retail improved 4 points to minus 11. Services confidence stood at minus 4, up from minus 7 in the prior month.
Further, confidence in financial services, which is excluded from the economic sentiment, declined in November. This was mainly due to disappointing demand over the past three months and bleaker demand expectations for the next three months.
Commenting on survey results, Christoph Weil, a Commerzbank analyst, said continued brightening of sentiment shows that the uncertainty shock in the wake of the Lehman bankruptcy has faded. If the picture of average growth at most next year materializes, then economic sentiment will continue to edge towards 100 in the next few months but is likely to dip slightly again from spring 2010.
In EU27, economic confidence rose 1.9 points to 87.9 in November as majority of the member states reported a general improvement in sentiment. The indicator strengthened sharply in the Netherlands, while the improvements were more modest in Poland, Italy, France, Germany and Spain. By contrast, the UK witnessed a sizeable drop.
A separate survey showed that business confidence strengthened in November due to a broad-based improvement in sentiment among managers. The business climate indicator for the euro area rose in November to minus 1.56 from a revised reading of minus 1.79 in October. Economists were expecting the index to rise to minus 1.65 in November. However, it remained at a subdued level, suggesting that annual growth in industrial production was still negative in October.
The majority of companies showed higher production expectations, helped by better outlook for export and overall order books. Also, managers' assessment of the production trend observed in recent months improved. Finally, stocks of finished goods continued to decline. The level of stocks now stands just below its long-term average.
The Eurozone economy had emerged out of its worst recession since the second world war helped by the positive impact of stimulus measures adopted by member countries. The economy expanded 0.4% sequentially in the third quarter, after contracting for five straight quarters.
Commerzbank believes that brighter sentiment will not prompt the central bank to make a fast exit from its very expansionary monetary policy. The analyst expects the European Central Bank not to make the first rate hike until summer 2010.
Martin van Vliet, an economist at ING bank, noted that lingering unemployment fears are an important impediment to a sustained recovery in consumer spending. The economist added that the ECB may be on the verge of scaling back some of it emergency liquidity operations, actual rate hikes still appear to be a distant prospect.
Earlier this month, the central bank had maintained its key interest rate at a record low at 1%. The ECB President Jean-Claude Trichet gave a strong indication that the central bank is preparing to rollback unconventional measures to mop up excess liquidity from the Eurozone economy.
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