Eurozone economic confidence improved for the first time in nine months despite the European Union’s political crisis, but inflation is back above the crucial 2 per cent level watched by the European Central Bank.
The European Commission’s “economic sentiment” survey on Thursday suggested that the positive effects of a weaker euro had overshadowed the impact on the economic mood of higher oil prices and political uncertainty that followed the French and Dutch referendums on the EU constitution.
“The good news is that the eurozone is not sliding into recession,” said Dirk Schumacher, economist at Goldman Sachs in Frankfurt.
However, June economic sentiment deteriorated sharply in the UK - not in the 12-country eurozone, but an important eurozone export market.
At the same time, eurozone inflation in rose to 2.1 per cent in June from 1.9 per cent in May, according to a “flash” estimate by Eurostat, the EU’s statistical unit. Economists warned that energy prices would continue to push inflation higher in July, with droughts in parts of Europe threatening higher food prices later this year.
The ECB’s inflation worries and the euro’s recent weakness have calmed speculation about a possible eurozone rate cut although many economists argue a reduction is warranted given the eurozone’s weak growth.
Jean-Michel Six, European economist at the Standard Poor’s rating agency said: “If the ECB does not cut rates, the risk is high that the bank might replicate the serious mistakes made by the Bank of Japan 12 years ago, which resulted in the Japanese economy being caught in a liquidity trap.” Michael Dicks, European economist at Lehman Brothers, said the ECB might come around to a cut, “maybe after a protracted period of gloom, and not just at home”.
The ECB defines price stability as an inflation rate “below but close” to 2 per cent. The Commission’s eurozone “economic sentiment indicator” had seen an almost uninterrupted decline since last October. But it rose from 96.1 in May to 96.3 in June, helped by a particularly strong increase in France that surprised economists.
The Commission claimed “a bottoming out of economic sentiment”. Nevertheless, the mood in Italy continued to deteriorate, with the country’s index dropping to the lowest level since July 2003. UK economic sentiment indicator fell to the lowest level since October 2003.
German economic sentiment in remained unchanged. Separately, seasonally-adjusted German unemployment figures showed an unexpected 23,000 fall last month to 4.86m, attributed to labour market measures rather than a turnaround. That nudged Germany’s unemployment rate down to 11.7 per cent from 11.8 per cent.
Meanwhile, just 30 days into Mr de Villepin’s government French households appear to be increasingly pessimistic, with surveys showing confidence at its lowest level in almost two years. Insee, the Paris-based statistics office, said on Thursday its index of French household confidence declined from minus 29 in May to minus 30 in June, the lowest level since a new survey was introduced in November 2003.