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Euro zone sentiment worsens, growth to slow

Brussels, July 28, 2011

Economic sentiment in the euro zone worsened more than expected this month with optimism fading in all sectors, data showed on Thursday.

It signalled slower expansion of the economy in the second half of this year.

The European Commission's monthly sentiment index, based on a survey of businessmen and consumers across the 17-nation euro zone, fell to 103.2 in July from 105.4 in June. This month's figure was the lowest reading since 102.2 in August 2010.

The index has been falling every month since February. Analysts polled by Reuters had expected a fall to 104.0 in July.

'It is a clear soft patch, worse than expected. Bad news, clearly. We are on a downward trend since the start of the year,' said Carsten Brzeski, economist at ING.

He and other analysts said sentiment had been hit by the sovereign debt crises in several weak euro zone states, as well as by signs of weaker growth in countries such as China and the United States. But they said the euro zone was probably not heading back into recession, after emerging from one in 2009.

'Given that euro zone fundamentals remain sound, we stick to our view that this is not the beginning of a new downturn, but rather a mid-cycle slowdown,' said Chiara Corsa, economist at Unicredit.

The commission said sentiment in industry worsened to 1.1 from 3.5, in services to 7.9 from 10.1, and among consumers to -11.2 from -9.7.

'Today's data signal that the slowdown is set to continue in the second half of the year. The Composite Purchasing Managers Index for activity released last week showed a similar trend,' said Clemente De Lucia, economist at BNP Paribas.

The sentiment data, as well as market jitters about Italy's ability to cope with its sovereign debt, pushed the euro down to around $1.4280 on Thursday morning from $1.4370.

Combined with continued pressure for higher inflation in the euro zone, the data may sharpen the European Central Bank's dilemma over whether to raise interest rates further this year, after a 0.25 percentage point hike in its key rate this month.

Although the survey showed selling price expectations among manufacturers fell sharply in July to 12.5 from 16.1, consumer inflation expectations 12 months ahead inched up to 25.4 from 24.6.

'The ECB currently seems minded to raise interest rates again before the end of 2011 after hiking by 25 basis points in both April and July,' said Howard Archer, economist at IHS Global Insight.

'However, while a further interest rate hike in the fourth quarter is clearly very possible, we suspect that markedly slower euro zone growth and likely recurrent sovereign debt tensions will present an increasingly compelling case for the ECB to hold off from further monetary policy tightening this year.'

The Commission's business climate index, which points to the phase in the business cycle, tumbled to 0.45 in July from 0.95, giving its lowest reading since June 2010 when it was 0.36. - Reuters




Tags: economy | Euro zone | consumers |

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