Euro zone on road to recovery as May's economic morale exceeds expectations


Euro-zone economic morale improved more than expected in May, the European Commission said yesterday in a report which will bolster confidence that the 12-nation bloc is on the road to economic recovery.

Its overall measure of economic sentiment rose to 99.8, its highest since September 2001 when the devastating attacks on United States cities sent tremors through the euro-zone economy. That compared with April's 99.4 and beat expectations of a 99.7 reading as consumer confidence unexpectedly rose along with business confidence.

The figures will back up the upbeat picture European finance ministers meeting in Luxembourg have been painting of the euro- zone economy's current and future health.

"We have seen several indications that the manufacturing sector is on the way to recovery but so far had little signs of a pick-up in domestic demand," said Mr Teis Knuthsen, chief strategist at SEB Merchant in Stockholm. "The improvement in consumer confidence is therefore a welcome sign if we are to believe in the recovery story."

A breakdown showed the business sentiment index rose to -9 from -11 in April while the one measuring consumer confidence rose to -8 from -10. Economists had, on average, expected readings of -9.1 and -10.1 respectively.

"The favourable evolution of the indicator ... is attributable to the positive assessment of the economic situation over the next 12 months," the Commission said, referring to the consumer confidence component.

The data chimed with a pick-up in consumer morale reported by France, with consumer confidence in the bloc's second-largest economy rising to its strongest this year in May as it posted a strong rebound from April's four-year low.

"This improvement confirms that France is recovering," said Mr Olivier Eluere, economist at Crédit Lyonnais.

The rebound in euro-zone consumer confidence caught analysts off guard as they had expected continuing concern about job prospects and inflation to crimp household sentiment.

Still, there are signs that job cuts announced during the worst of the euro-zone economic downturn may finally be feeding through to the official jobless figures. The euro-zone jobless rate unexpectedly registered its first increase since January, climbing to 8.3 per cent in April from 8.2 per cent the previous month.

However, changes in the way Spain defines unemployment led to sharp revisions to March data, which had previously been reported as 8.4 per cent, and to past jobless figures. This helped take some of the sting out of that rise.

Economists, who had not been expecting the revision, had expected the jobless rate to stay unchanged.

Unemployment was lowest in Luxembourg at 2.2 per cent, while Spain remained at the bottom of the list with a jobless rate of 11.3 per cent, Eurostat said.

Over the past year, unemployment has risen in Ireland from 3.7 to 4.4 per cent, in Austria from 3.4 to 4.0 per cent, in Luxembourg from 2.0 to 2.2 per cent and in Portugal from 4.0 to 4.4 per cent.

In Denmark, it fell from 4.4 to 4.1 per cent.

While the robustness of euro-zone consumer confidence surprised analysts, they had anticipated an improvement in the industrial confidence measure given rises in business confidence reported recently in Germany, France, Italy and Belgium. Confidence rose the most in Belgium, Greece, Italy and Spain (0.4 points), while Portugal showed the biggest drop with 0.8 points. Denmark, which does not belong to the euro zone, posted a fall of 0.6 points.

The Ifo index of business sentiment in Germany, Europe's largest economy, rebounded more strongly than expected in May, with the improvement in the expectations index which reflects views of business six months ahead particularly strong.

The upbeat picture was reinforced by another report released yesterday showing the euro-zone business climate had improved more than expected.

The figure, which the Commission releases separately from the euro-zone business sentiment index, rose by more than expected to -0.24 in May, its highest since June 2001.

That compared with April's -0.64 reading and the -0.5 expected by economists. The Commission said the increase was mainly driven by improving order books, including for exports.