Confidence grows in euro zone economy, still fragile

Reuters, Tuesday 28 Feb 2012

The European Commission's economic sentiment indicator rose by a point in the euro zone in February, its second monthly increase in a row

Confidence in the euro zone's economy rose for a second consecutive month in February, a survey showed on Tuesday, confirming a wider stabilisation across Europe that likely signals only a mild recession this year.

The European Commission's economic sentiment indicator rose by a point in the euro zone to 94.4, better than the 93.9 forecast by economists in a Reuters poll, and a recovery to October's level. The rise built on January's increase, which was the first improvement in sentiment since March last year.

But business morale was fractionally worse than forecast, rising to -0.18 compared with economists' estimates of -0.15. On a national level, German optimism in the economy barely rose from January, even if France showed some recovery.

"There are few signs here that a burst of economic growth is going to help to solve the debt crisis," said Jonathan Loynes, chief European economist at Capital Economics. "The indicator is still well below the levels seen throughout most of last year and consistent, on past form, with broadly stagnant GDP."

The Commission expects the euro zone's economic output to shrink 0.3 per cent in 2012, the second recession in just three years for the currency area. But last year's political deal among most EU countries to commit to budget austerity and the European Central Bank's offer of near unlimited funds have calmed markets and bought policymakers some time.

The green shoots of recovery are a turnaround from the final months of 2011, when investors forced borrowing costs to unsustainably high levels for Spain and Italy and depressed business morale in the euro zone and the wider European Union.

The EU's top economic official Olli Rehn now sees a recovery in the second half of the year if EU leaders can agree to a large enough financial firewall to assuage any remaining concerns about southern Europe's ability to honour its debts.

A stronger economic expansion in the United States in the last quarter of 2011 and robust growth in Asia have also maintained demand for Europe's goods, particularly those of competitive Germany and its high quality manufactured exports.

"Plenty to worry about"

Still, the euro zone's recovery is fragile and there is wide divergence between the fortunes of wealthy northern Europe and those on the indebted southern periphery.

The closely-watched purchasing managers' index for the euro zone, released last week, fell unexpectedly in February, missing even the lowest forecast in a Reuters poll.

The fragility complicates the task of EU leaders who are meeting in Brussels on Thursday and Friday to try and sketch a path out of the economic slump and resolve the debt crisis.

The Commission's survey highlighted the difficulties.

Confidence in industry improved in February, while optimism in services remained unchanged from January. Business's employment expectations remained well blow levels of early last year and Europeans' worries about hanging on to their jobs intensified.

Unemployment in the euro zone is at record highs at about 10 per cent of the working population and is expected to rise this year as the currency area heads into its recession.

France reported a 1.6-point increase in economic sentiment, and there were rises in the Netherlands and Italy. But there was barely any change from January's level in Germany, Europe's biggest economy, which nudged up 0.1 point. Spain saw sentiment worsen and morale remained low in Portugal and Greece.

"With more fiscal austerity in the pipeline, the debt crisis still unresolved and oil prices in euro terms breaching record highs, consumers and businesses still have plenty to worry about," said Martin van Vliet, an economist at ING.

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