Economic sentiment in the euro zone slowed much more sharply than expected in July to its lowest in over 5 years, data showed today, pointing to a stagnant economy and boosting expectations that interest rates will be kept on hold this year.
The European Commission said its economic sentiment indicator fell to 89.5 points, its lowest since March 2003, from a downwardly revised 94.8 in June.
Economists had predicted a July reading of 93 points. "At current levels, it is consistent with roughly stagnant GDP growth", Nick Kounis, chief economist at Fortis, said.
Aurelio Maccario, chief euro zone economist at UniCredit said the euro zone economy was heading toward a stagnation phase bound to last at best a few months.
"Things should slightly improve only at the turn of the year," he added. Sentiment in industry declined by 3 points to -8, among consumers by 3 points to -20, in the retail sector by 5 points to -9, and in construction by 3 points to -14.
The services sector, which generates more than two thirds of the 15-country euro zone's gross domestic product, saw the steepest decline, by 8 points to 1.
In reaction, the euro slipped briefly from a session high against the dollar and bund futures rose.
The figures were the latest in a string of weak data, which economists say may point to a contraction in the currency area in the second quarter of 2008 after 0.7 percent growth in the previous three months.
The economy is burdened by a strong euro, soaring prices of food and energy, tight credit conditions and an increasingly visible slowdown in other major industrialised countries.
Japanese industrial output fell in April-June for the second straight quarter, the first such drop in seven years, suggesting that the nation's longest postwar growth cycle is fizzling out as high energy costs curtail corporate activity.
In Spain, retail sales suffered a record plunge year-on-year in June as a severe economic slowdown began to slam both multinational and domestic retailers.