Eurozone Economy Shows Only Slow Decline

Economic prospects across the 15-country eurozone are declining only slowly, although the outlook for Spain is deteriorating much more dramatically, a closely-watched survey indicated on Monday.
Financial Times 1/8/2008 6:29:39 AM

Confidence dipped slightly at the end of last year but remained significantly higher than the long-run average, according to the European Commission’s latest monthly economic sentiment survey.

In Spain, however, it dropped to the lowest level since February 1994.

The results supported the European Central Bank’s view that, despite mounting fears about the US and UK economies, eurozone growth has so far largely escaped any dramatic impact from last year’s financial market turmoil.

With eurozone inflation still high, that is likely to keep the ECB in hawkish mood on Thursday, when it holds its first meeting of 2008 to set interest rates. The eurozone slowdown was taking more the form of an orderly retreat than of a dramatic run for cover”, said Gilles Moec, economist at Bank of America.

The ECB’s main policy rate is expected to remain unchanged at 4 per cent on Thursday. Jean-Claude Trichet, president, last month revealed that some governing council members had spoken out in favour of higher interest rates. He might drop similar hints again this week – partly as a warning signal ahead of pay negotiations in Germany.

Mr Trichet on Monday argued that global growth was continuing at a pace which is quite robust even if there is a little bit of slowing down” – which would continue to support eurozone exports as the US economy decelerated.

However, speaking after a meeting with international counterparts in Basel, Switzerland, the ECB president struck a note of caution by stressing the risks to the downside” posed by higher commodity prices and the impact of the global credit squeeze.

Financial markets remain dubious about whether the ECB would make real its threats of higher interest rates.

The Commission’s economic sentiment indicator is on a clear downward path. At 104.7 in December, down from 104.8 in November, the index was at its lowest since March 2006.

The strength of the euro and higher financing costs caused by the credit squeeze are expected to slow growth in coming months.

The pound’s recent weakness has driven the euro’s trade-weighted index to fresh highs, adding to eurozone exporters’ difficulties.

Spain is demonstrating that prospects could vary significantly across the eurozone. Since September, confidence in the Spanish construction sector has tumbled, and the Commission’s survey results showed sentiment deteriorated in December in Spanish industry, retailing and among consumers as well.

The ECB might take comfort from the survey’s results on consumer price expectations – which found no change compared with November.

Eurozone Economy Shows Only Slow Decline