UPDATE 1-Euro zone sentiment, inflation expectations dip in April

Tue Apr 29, 2014 7:50am EDT

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(Adds economists' comments)

By Jan Strupczewski

BRUSSELS, April 29 (Reuters) - Euro zone economic sentiment deteriorated slightly in April, defying forecasts of further improvement, while inflation expectations continued to fall, European Commission data showed on Tuesday.

The monthly Commission survey showed that economic sentiment in the 18 countries sharing the euro eased to 102.0 in April from 102.5 in March, mainly because of a dip in confidence in the construction sector and in services.

Economists polled by Reuters had expected an improvement to 103.0 in April.

But some economists said the decline could be just a blip as it followed 11 monthly improvements.

"In general, euro zone economic sentiment is still defying the laws of economic gravity," said David Brown, an economist at New View Economics, an independent consulting group.

"Despite the proximity of recession risk, fragile recovery, near record unemployment and chill political headwinds blowing in from the Ukraine, economic confidence is still reasonably upbeat," he said.

But others said the decline could be a sign of the risks that the euro zone recovery faced.

"We interpret the break in this uptrend as a first sign that the gloomier external economic climate will not leave the euro zone economy unscathed," said Christoph Weil, an economist at Commerzbank in Germany.

"Problems in many emerging countries after the end of a decade of cheap money, the continued slowdown of growth in China and, most recently, the uncertainly stemming from the Ukraine crisis will prevent economic growth in the euro zone from strengthening in the further course of the year," he said.

"We expect the economy to continue to grow at a rate of 0.25 per quarter in the coming quarters and anticipate a plus of 1.0 percent on average in 2014," he said.

INFLATION

The Commission survey also showed that the indicator of consumers' inflation expectations for the next 12 months fell to 7.5 points in April from 10.8 in March, continuing a steady decline since last October.

Selling price expectations among manufacturers also fell, to -1.4 in April from -0.7 in March and -0.2 in February.

The expectations are important because inflation has been stuck in what the European Central Bank calls the "danger zone" below 1 percent year-on-year since October, mainly because of falling energy prices and food and the appreciation of the euro.

This creates a risk of deflation, and the ECB has said that if the euro exchange rate appreciated further, it would respond with monetary policy measures. The ECB meets to discuss policy on May 8.

Separately, the Commission's business climate indicator, which points to which phase of the business cycle the economy is in, fell to 0.27 in April from 0.40 in March.

"Managers' evaluation of the past and expected production, as well as of the current level of export order books worsened, while their assessment of overall order books improved and their appraisal of the stocks of finished products remained broadly unchanged," the Commission said. (Reporting by Jan Strupczewski; Editing by John O'Donnell and Pravin Char)

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