Eurozone Growth Outlook Darkens


Sharp declines in economic confidence in Spain and Italy have darkened the growth outlook for the 15-country eurozone but some relief may be in sight on the inflation front, according to latest economic data.

The European Commission reported a steep decline in its eurozone economic sentiment” indicator in February to the lowest level since December 2005, pointing to a significant deceleration in activity.

The indicator, which gauges optimism across all economic sectors and is regarded as a good guide to likely future trends, fell to 100.1 points in February from 101.7 in January.

The fall was led by the region’s service sector but the index for Spain, hit by fears of a bursting property bubble, was particularly gloomy. It plunged to the lowest level since January 1994. Italy’s index also dropped steeply, to the lowest level since August 2005.

In contrast, Germany reported an increase in confidence – and the overall fall in eurozone manufacturing industry’s optimism was significantly less than in the services sector. Meanwhile, eurozone unemployment was at a record low of 7.1 per cent in January, according to Eurostat, the European Union’s statistical office.

The results remained consistent with a slowdown across the eurozone, but no dramatic drop overall and with Germany propping up growth. The European Central Bank has argued this week that signs have yet to emerge of any credit crunch” hitting economic activity and that the impact of the global financial market turmoil will not be sizable.

Still, the effects of a stronger euro – which has soared above $1.52 for the first time – and higher borrowing costs since 2005 appear to be taking their toll.

The slowdown in growth will encourage speculation that the ECB will be forced to cut interest rates in coming months. High current inflation rates suggest that no cut in borrowing costs is imminent but inflation data on Friday provided some grounds for comfort. January’s eurozone inflation rate was confirmed at 3.2 per cent – a 14-year high – but core” inflation, excluding food and fuel prices, for the same month fell to 1.7 per cent, down from 1.9 per cent in December.

At the same time, Germany’s statistics office revised down January’s inflation rate for Europe’s largest economy to 2.9 per cent, compared with the originally-reported 3 per cent.

However, the ECB’s inflation forecasts for the next two years, which are due to be released at a meeting of its governing council next week, are still widely-expected to be revised up. That would leave no room for a near-term cut” in interest rates, said Marco Valli at Unicredit in Milan. However, once it will be clear that the downward trend in business sentiment is not temporary, they will be forced to move.”


TradingEconomics.com, Bloomberg
2/29/2008 6:48:35 AM