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Eurozone morale slips in April, but deflation threat eases

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Confidence in the eurozone's economy slipped slightly in April but business morale improved and household expectations of rising prices suggested that the threat of deflation may have been overcome.

[BRUSSELS] Confidence in the eurozone's economy slipped slightly in April but business morale improved and household expectations of rising prices suggested that the threat of deflation may have been overcome.

The European Commission's economic sentiment indicator fell by 0.2 points to 103.7, worse than the 103.9 that economists had forecast in a Reuters poll, although there were no signs that a recovery that began in December is falling away.

Business morale rose 0.09 points to 0.32. "The positive trend will continue, as lower oil prices and the ECB's bond-buying programme increase disposable income,"said Achilleas Chrysostomou, an European economist at Standard Chartered in London.

Most strikingly, consumer inflation expectations continued to climb back up from their record low in January, rising for a third straight month and offering evidence that the European Central Bank's money-printing plan is having the desired effect.

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To combat low inflation, the ECB has begun printing money to buy euro zone government bonds, a policy known as quantitative easing, or QE, that will see it pump 60 billion euros (S$86 billion) a month into the eurozone's economy.

Separately, Belgian inflation rose in April, the economy ministry said, and stood in positive territory for the first time in six months.

Manufacturers and services companies also continued to expect prices to rise, a change in sentiment from just six months ago, when many economists saw the euro zone heading for a Japan-style era of deflation and depressed demand. "This suggests that the rise in oil prices from January's lows, improving euro zone economic activity and the ECB's QE programme are combining to lift inflation expectations," Howard Archer, chief European economist at IHS, wrote in a note.

Still, the eurozone's recovery remains fragile and there is uncertainty surrounding Greece. While economic morale in Spain rose strongly in April, it slipped in Germany and was unchanged in Italy. In France, the euro zone's second-biggest economy, the mood continued to be downbeat and the European Commission's indicator fell 1.4 points. "Germany and France are quite divergent and France remains a concern, there's a lot of uncertainty in French politics, reforms are being implemented at a slow pace," Standard Chartered's Mr Chrysostomou said.

In Greece, which faces bankruptcy if it cannot reach a deal soon with its international creditors, economic sentiment sank to 92.7 from 96.8, which BNP Paribas noted was one of the biggest falls on record. "Ouch," was the bank's reaction in a note to clients.

Eurozone services led the way in April, with confidence improving by 0.6 points, mainly thanks to managers' good sense of past demand and recent business in general.

That helped offset flat industry confidence and retail trade confidence and a fall in construction confidence.

Economists polled by Reuters earlier this month say that overall, the recovery is sustainable and see 1.4 per cent economic growth in the bloc in 2015, rising to 1.6 per cent in 2016.

REUTERS

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