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The partially built new headquarters of the European Central Bank (ECB) is seen behind a fence with razor wire at its construction site in Frankfurt, September 19, 2012. (KAI PFAFFENBACH/REUTERS)
The partially built new headquarters of the European Central Bank (ECB) is seen behind a fence with razor wire at its construction site in Frankfurt, September 19, 2012. (KAI PFAFFENBACH/REUTERS)

Euro zone confidence falls sharply, inflation expectations rise Add to ...

Euro zone economic sentiment defied expectations of stabilization and again fell sharply in September, underlining the economic gloom brought on by the sovereign debt crisis as the euro zone sinks into a recession.

The European Commission’s monthly economic sentiment survey showed the index for the 17 countries sharing the euro falling to 85 points this month from 86.1 in August. Economists polled by Reuters had expected a flat reading on Thursday.

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“It is bad. Everything is down, we are heading towards another quarterly economic contraction,” said Carsten Brzeski, economist at ING bank.

The euro zone economy stagnated in the first three months of the year quarter-on-quarter and contracted 0.2 per cent in the April-June period. Economists expect another contraction in the third quarter, which would take the euro zone into recession.

“The data also shows that while the ECB promise of bond buying and the German court ruling (endorsing the euro zone’s permanent bailout fund) did a lot to calm financial markets, there is still the big issue of non-existent growth,” Mr. Brzeski said.

The European Commission’s business climate indicator for the euro area, which points to the phase of the economic cycle, fell to –1.34 points in September from –1.18 in August, against market expectations of –1.19 points. The September reading was the lowest since October 2009.

The Commission survey showed euro zone sentiment in industry declined to –16.1 in September from –15.4 in August, and to –12 in the services sector from –10.8.

Sentiment among consumers fell to –25.9 from –24.6 and to –18.6 from –17.2 in retail trade. Construction was the only sector where confidence improved marginally, to –31.9 from –33.1 in August.

The data also showed that inflation expectations rose among producers, the services sector and households alike, potentially complicating any possible decision by the European Central Bank to cut interest rates and help the economy.

But ING’s Mr. Brzeski said the results of the Commission survey on inflation expectations were more closely correlated to ongoing price developments, with opinions strongly influenced by the spike in fuel prices.

“It does not make life easier for the ECB, but, under (President Mario) Draghi, the ECB has become more growth oriented with inflation more a derivative of growth, so with this drop in growth, the window for another rate cut this year is still open,” he added.

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