Euro zone economic sentiment improved more than expected in July, buoyed by strong figures from Germany that point to a sustained economic recovery for the currency area as it overcomes the sovereign debt crisis.
The European Commission said its economic sentiment indicator for the 16-nation currency area rose to 101.3 in July from an upwardly revised 99.0 in June.
Economic morale is the latest in a string of indicators that have shown the currency area continues to recover from the worst economic crisis in decades, despite turbulence on its sovereign debt market and uncertainty about the health of banks.
"July's improvement in the (euro zone) consumer and business surveys adds to the evidence that the euro-zone is performing surprisingly well, but with stark divergences between countries," said Jennifer Mckeown, senior European economist at Capital Economics.
Martin van Vliet said: "It confirms the spillover effect of the debt crisis to the real economy was limited. But the euro zone economy is bound to lose steam in the second half of the year. For now, let's enjoy it while it lasts." Growth may falter because of fiscal austerity measures ordered by many governments to prevent the sovereign debt crisis from spreading from Greece to other countries. Foreign demand for European goods is also expected to diminish.
The Commission said economic sentiment improved thanks to an increase in the index for the export-driven industrial sector to -4 from -6 and improvement in services to 6 from 4.
Morale of consumers, whose demand is crucial for making economic growth self-sustaining, rose to -14 from -17.
The increase was driven by strong figures in Germany, the euro zone's biggest economy, where economic sentiment rose to 110.1 from 106.1. The figure also increased in France and Italy, but fell in Spain.
In the wider 27-nation European Union, economic sentiment grew to 102.2 in July from 100.3 in June.
The Commission's separate business climate indicator for the euro zone increased more than expected, rising to 0.66 in July from 0.40 in June. It was the highest reading since March, 2008.
"The improvement in the indicator suggests that economic activity in industry will continue to recover in the coming months, although it has still some way to go to reach its pre-crisis level," the Commission said in a statement.
It has forecast that the euro zone will register growth of 0.9 per cent this year after gross domestic product contracted 4.1 per cent in 2009.
Analysts say the recovery will gain momentum only if consumers begin to spend more. So far, the euro zone's economic upturn has relied mainly on exports as rising unemployment is undermining consumer spending power. Weakness in the euro against the dollar and other currencies has boosted exports.
The Commission survey also showed that euro zone inflation expectation remained muted.
Selling price expectations in industry fell to 5 in July from 6 in June, while consumers' assessment of price trends over the next 12 months remained unchanged at 11.
The European Central Bank, which watches the indicators closely, is expected to leave its main interest rate at 1.0 per cent well into 2011.
"Another interesting development is that houseshold price expectations are stable, which backs up our view that the ECB is going to keep interest rates on hold for the time being," said Astrid Schilo, European economist at HSBC.
Reuters