August 28, 2009 12:57 pm

Optimists keep faith in eurozone recovery

The eurozone’s economic recovery is gathering pace but manufacturers are reporting record surplus capacity and consumers have become still more convinced that prices have further to fall.

The European Commission’s latest “economic sentiment” survey highlighted the precariousness of the recovery that began in the second quarter of this year. It shows eurozone optimism levels rose in August for the fifth consecutive month, to the highest since October, but remained significantly below the average of the past two decades

Eurozone manufacturers, meanwhile, reported that capacity utilisation had fallen to the lowest level since comparable data were first collected in 1990.

Consumers’ expectations about prices in the next 12 months were skewed more towards falls than at any time since that survey started in 1985. Manufacturers’ stocks also remained above their long-term average in August.

The survey results are likely to reinforce a widespread view that while the third quarter is likely to have seen the end of the eurozone’s recession, longer-term growth prospects remain subdued.

Unemployment is rising and European Central Bank data earlier this week suggested banks were still not providing the credit needed to oil the wheels of recovery. Volatile commodity prices could act as a further constraint on growth.

The commission’s sentiment indicator plunged dramatically late last year after the collapse of Lehman Brothers, the investment bank. But Jacques Cailloux, European economist at Royal Bank of Scotland, said comfort could be taken from the speed of the recovery. “The reversing and unwinding of the shock still seems to be quite strong,” he said.

Eurozone consumers’ expectations about price trends will worry the ECB, which aims to keep annual eurozone inflation “below but close” to 2 per cent.

However, evidence is mounting that the 16-country region’s brush with negative inflation rates is drawing to a close. Germany this week saw a rebound in its inflation rate, reporting that consumer prices in August were unchanged compared with the same month a year before. For July, it had reported a 0.7 per cent fall.

The ECB is expected to leave its main interest rate unchanged at the record low level of 1 per cent at its monetary policy meeting next week. It is also unlikely to announce that any surcharge will be imposed on its next offer of unlimited one-year loans, scheduled for late September. The first such offer, in June, saw it pumping in €442bn in 12-month liquidity in an attempt to help restore normal working in financial markets.

The commission’s eurozone “economic sentiment” indicator, which is regarded as offering a guide to future trends in activity, stood at 80.6 in August, up from 76.0 in July, with the services sector showing a particularly strong improvement. Among the eurozone countries, Germany and the Netherlands reported the biggest increases.

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