Economic mood brightens in recession-hit eurozone

Reuters, DPA/Brussels

 Confidence in the eurozone economy grew by more than expected in May, with hope that the worst of the crisis may be over spreading to countries that have been on its frontline.

Economic morale in the 17 states that use the euro increased by 0.8 point to 89.4, the European Commission said. Economists polled by Reuters had expected an increase to 89.

“This is in line with a moderate improvement, but we need to see this sustained,” said Francois Cabau, an economist at Barclays Capital. “We also need to see this translate into the real growth.”

In Greece, the first eurozone state to be bailed out and heading for its sixth straight year of recession, sentiment climbed to a five-year high, while Portugal and Italy also recorded stronger readings.

“For the crisis countries, (this data offers) yet more signs that the worst is over. Southern Europe saw some of the strongest improvements,” Christian Schulz, senior economist at Berenberg Bank, wrote in a note.

The OECD said on Wednesday the eurozone economy will contract by 0.6% this year, rebounding by 1.1% in 2014 — a more pessimistic picture for the bloc than predicted by the European Commission, which sees a 0.4 contraction in 2013.

After a strong start to the year, economic morale weakened in March, clouding hopes for swift recovery.

But in May confidence improved in all five of the eurozone’s largest economies — Germany, France, Italy, Spain and the Netherlands. The upturn was notable across all sectors except for construction.

The bloc’s largest economy, Germany, which is expected to gather momentum in the second quarter of this year, saw a 0.6 point rise in its economic mood, while recession-hit France registered a 0.9-point jump.

Morale in bailed-out Portugal rose 1.8 to 84.2 and in Italy gained 1.5 to 84.9, though Spain inched up just 0.1 to 89.8.

Helping to buoy hopes of recovery, the European Central Bank cut its key interest rate this month to a new record low and said the eurozone was more stable than a year ago — though economic conditions remained challenging and governments needed to push on with reforms.

ECB President Mario Draghi has said the bank is ready to cut interest rates again if the bloc’s economy deteriorates further.

The increase in industrial confidence was driven by a much more positive assessment of the current level of order books, the Commission said.

The Commission’s measure of the eurozone’s business cycle also picked up again in May, increasing by more than expected to -0.76, compared with economists’ consensus for a -0.87 level.

“The recovery was driven by brightening sentiment in all business sectors except for construction,” the commission said.

The survey index measuring confidence in the building industry fell 2 points as construction companies were hit by a long cold winter.

But the fall in the construction business was cancelled out by a gain in confidence in the 17-member currency bloc’s services and industrial sectors, as well among retailers and consumers.

The sixth consecutive rise in consumer confidence left the index measuring the mood among households at its highest level in nearly a year.

The gain in consumer confidence was despite record high unemployment across the region.

“The positive overall developments were also reflected in a sharply improving assessment (by industry) of the past production and moderate improvements with regard to the current level of export order books,” the commission said.

“The European Commission’s consumer and business survey for May suggests that the recession may be easing,” said Ben May, European economist at the research group Capital Economics.

“But the survey still suggests that eurozone gross domestic product is shrinking, implying that the European Central Bank (ECB) may eventually announce more policy support,” he said.

Other economists echoed May’s comments.

“While it is encouraging to see that confidence is again moving in the right direction, there is a long way to go before confidence is restored,” said ING bank economist Martin van Vliet.

“Any nascent economic recovery later this year is therefore likely to be slow, and will probably be largely confided to the ‘core’ countries (such as Germany and other northern European states),” he said.

The commission’s survey also found that employment plans were revised upwards in the retail trade along with the industrial and services sectors, but were revised down sharply in the construction industry.

The commission said confidence in the broader 27-member Eu also rose in May, climbing to 90.8 points from 89.7 last month.