European business confidence buoyant

The eurozone’s near-perfect recovery remains on track with economic confidence dipping only slightly this month and inflation remaining within the European Central Bank’s target range.

The European Commission reported that its economic sentiment index fell by 0.4 points to 111.7 in June from a six-year high in May. But business confidence remains high and consumer confidence has weakened only slightly. Industry saw the eurozone’s investment surge continuing – expecting an 8 per cent increase this year.

But German consumer spending still showed surprisingly few signs of life: retail sales in Europe’s largest economy fell by an unexpectedly-sharp 1.8 per cent between April and May, the country’s statistical office reported.

Separately, eurozone inflation held steady at 1.9 per cent in June, according to a flash estimate by Eurostat, the European Union’s statistical office. That was within the ECB’s definition of price stability – an annual inflation rate below but close to 2 per cent.

However, the ECB had originally expected inflation to fall further. Instead its projections have been blown off course by higher-than-expected oil prices. With eurozone inflation expected to rise back above 2 per cent towards the end of the year, the ECB is expected to keep raising its main interest rate. Another quarter percentage point rise to 4.25 per cent is likley in September.

The ECB’s fear is that robust economic activity and interest rates still at levels supportive of growth will inevitably lead to higher inflation.

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