Economic sentiment in euro zone slides to a five-year low

Economic sentiment in the euro zone skidded much more than expected in July to its lowest in over five years, data showed yesterday, pointing to a stagnant economy and boosting expectations that interest rates will be kept on hold this year.

The European Commission said its economic sentiment indicator fell to 89.5 points, its lowest since March 2003, from a downwardly revised 94.8 in June.

Economists had predicted a July reading of 93 points.

"At current levels, it is consistent with roughly stagnant GDP growth," Nick Kounis, chief economist at Fortis, said. Aurelio Maccario, chief euro zone economist at UniCredit said the euro zone economy was heading toward a stagnation phase bound to last at best a few months.

"Things should slightly improve only at the turn of the year," he said.

Sentiment in industry declined by 3 points to -8, among consumers by 3 points to -20, in the retail sector by 5 points to -9, and in construction by 3 points to -14. The services sector, which generates more than two thirds of the 15-country euro zone's gross domestic product, saw the steepest decline, by 8 points to 1.

In reaction, the euro slipped briefly from a session high against the dollar and bund futures rose.

The figures were the latest in a string of weak data, which economists say may point to a contraction in the currency area in the second quarter of 2008 after 0.7 per cent growth in the previous three months.

The economy is burdened by a strong euro, soaring prices of food and energy, tight credit conditions and an increasingly visible slowdown in other major industrialised countries.

Japanese industrial output fell in April-June for the second straight quarter, the first such drop in seven years, suggesting that the nation's longest postwar growth cycle is fizzling out as high energy costs curtail corporate activity.

In Spain, retail sales suffered a record plunge year-on-year in June as a severe economic slowdown began to slam both multinational and domestic retailers.

In a sign that the real economy is affected, German engineering group Siemens said it expected to see weaker order growth in coming quarters. Separately, the European Commission said its Business Climate Indicator (BCI), which helps establish the phase of the business cycle, fell to -0.21 point in July from 0.13 in June, hitting its lowest since May 2005.

Worsening business morale was accompanied by a slight fall in consumer inflation expectations for the next 12 months to 30 points from 31, data showed.

Still, industry selling price expectations jumped to 20 points from 16 in June, providing a mixed picture for the European Central Bank, which is struggling to tame resurgent inflation.



The numbers

89.5: In points is the current economic sentiment indicator, its lowest since March 2003, from a downwardly revised 94.8 in June