Euro zone economic sentiment unexpectedly rose to its highest since mid-2001 in April as business turned more upbeat despite stagnant consumer morale. The European Commission hailed the improvement in the data it issued on Friday even as it played down a rise in the April euro zone inflation rate to 2.0 percent March's 1.7 percent. "The future is bright," said Gerassimos Thomas, the EU executive's spokesman on economic and monetary affairs. "Risks are very balanced and if we get confirmation of such good numbers also in the end of May we might be able to say at that stage that the downside risks are disappearing in our forecasts."
The data will underpin financial markets' expectations that the euro zone economic recovery will gather momentum during the course of this year -- a prospect that European Central Bank officials have been holding out in recent days. "The data is mixed enough to suggest the ECB will remain on hold. But we are not ruling out another rate cut, perhaps in the third quarter," said Gwyn Hacche, economist at HSBC. The ECB, which aims to keep inflation below but close to two percent, has kept its key rate at 2.0 percent since June 2003.
FIRMS UPBEAT
The economic sentiment index rose to 96.6, its highest since July 2001, from a revised 96.1 in March, the Commission said. Last month's figure had previously been reported as 96.0. The increase was led by an improvement in business morale that was echoed by a separate business climate indicator, which hit three-year highs as it posted its biggest monthly rise in almost two decades. Economists polled by had expected an overall reading of 96.00, with the business sentiment and consumer sentiment components forecast to stay unchanged from the previous month at minus 7.0 and minus 14.00 respectively.
While the consumer index matched forecasts, the business confidence component rose to minus 5.0, matching levels last seen in April 2001 and the Commission's separate business climate indicator rose to 0.38 in April from minus 0.07. It was the climate indicator's biggest monthly gain since 1985 and came as managers turned more upbeat about past and future production trends, order books, and stocks. The euro zone reports came in the same week that national reports showed Italian firms' confidence hit its highest in nearly two years and the Ifo research institute reported an unexpected rise in German business morale.
CONSUMERS KEEP WALLETS CLOSED
Still, rate cut talk is expected to stay alive as long as consumer morale stays subdued -- further evidence of which came from a monthly fall of 0.5 percent in retail sales in Germany, Europe's biggest economy. "Overall, the retail trade cannot be satisfied with first quarter turnover in 2004," said Johann Hellwege, managing director of Germany's BAG retailers' association. "As long as the politicians fail to reduce the high level of unemployment, domestic demand will not pick up." The euro zone unemployment rate has held steady at 8.8 percent for a full year, and French data on Friday showed the jobless rate in euro zone's second biggest economy was a full percentage point higher in March. Against this backdrop, households grew more worried about the unemployment outlook and less willing to make big purchases in the coming year, the Commission sentiment survey showed.///