The European Commission's monthly sentiment index,
based on a survey of businessmen and consumers across the 17-nation euro
zone, fell to 103.2 in July from 105.4 in June. This month's figure was
the lowest reading since 102.2 in August 2010.Analysts polled by
Reuters had expected the index, which has been falling every month since
February, to drop to 104.0 in July. The index is calculated from the
balance of positive and negative replies to questions on confidence in
the economy; its long-term average is 100."It is a clear soft patch,
worse than expected. Bad news, clearly. We are on a downward trend
since the start of the year," said Carsten Brzeski, economist at ING.He
and other analysts said sentiment had been hit by the sovereign debt
crises in several weak euro zone states, as well as by signs of weaker
growth in countries such as China and the United States. But they said
the euro zone was probably not heading back into recession, after
emerging from one in 2009."Given that euro zone fundamentals remain
sound, we stick to our view that this is not the beginning of a new
downturn, but rather a mid-cycle slowdown," said Chiara Corsa, economist
at Unicredit.The commission said sentiment in industry worsened to
1.1 from 3.5, in services to 7.9 from 10.1, and among consumers to -11.2
from -9.7."Today's data signal that the slowdown is set to continue
in the second half of the year. The Composite Purchasing Managers Index
for activity released last week showed a similar trend," said Clemente
De Lucia, economist at BNP Paribas.The sentiment data, as well as
market jitters about Italy's ability to cope with its sovereign debt,
pushed the euro down to around $1.4280 on Thursday morning from $1.4370.A
Reuters poll of analysts conducted in mid-July predicted the euro
zone's economy would grow just 0.4 percent per quarter from now until
next April — much slower than the 0.8 percent recorded in the first
quarter of this year.Combined with continued pressure for higher
inflation in the euro zone, Thursday's data may sharpen the European
Central Bank's dilemma over whether to raise interest rates further this
year, after a 0.25 percentage point hike in its key rate this month.Although
the survey found selling price expectations among manufacturers fell
sharply in July to 12.5 from 16.1, consumer inflation expectations 12
months ahead inched up to 25.4 from 24.6.Preliminary data from
Germany on Wednesday showed its consumer price inflation rose to 2.4
percent in July, suggesting this Friday's reading for the whole euro
zone could exceed the 2.7 percent forecast by economists — well above
the ECB's target of close to but below 2 percent.Meanwhile, euro
zone countries hit by debt crises are growing much more slowly than
healthy ones, leaving them vulnerable to any further interest rate
hikes.Capacity utilization in the euro zone, a measure of how much
of the economy's installed potential is being used, fell from the
previous quarter in July for the first time in two years, Thursday's
survey found. But this masked big divergences among countries, with
Germany remaining above its long-term average and economies on the
periphery of the region lagging."The ECB currently seems minded to
raise interest rates again before the end of 2011 after hiking by 25
basis points in both April and July," said Howard Archer, economist at
IHS Global Insight."However, while a further interest rate hike in
the fourth quarter is clearly very possible, we suspect that markedly
slower euro zone growth and likely recurrent sovereign debt tensions
will present an increasingly compelling case for the ECB to hold off
from further monetary policy tightening this year."The commission's
business climate index, which points to the phase in the business cycle,
tumbled to 0.45 in July from 0.95, giving its lowest reading since June
2010 when it was 0.36.
