October 28, 2010 / 10:29 AM / 9 years ago

UPDATE 1-Euro zone Oct sentiment up, inflation expectations flat

* Economic sentiment up at 34-month high

* Consumer, producer inflation expectations flat

(Recasts with economists’ comments)

By Jan Strupczewski

BRUSSELS, Oct 28 (Reuters) - Euro zone economic sentiment improved in October against market expectations of a flat reading, pointing to continued economic growth in the second half of the year, even if slower than the second quarter peak.

The European Commission’s monthly sentiment survey showed sentiment in the 16 countries using the euro rose to 104.1 points this month from 103.2 in September, the highest reading in almost three years.

Economists polled by Reuters had expected an unchanged reading.

“The marked rise in euro zone economic sentiment to a 34-month high in October boosts hopes that economic activity in the region will hold up pretty well in the near term at least,” said Howard Archer, economist at IHS Global Insight.

“However, there is no guarantee that elevated confidence will lift economic activity,” he said.

The improvement was mainly due to more optimism in industry, where sentiment rose to 0 from -2 in September. Confidence among consumers and in the services sector was unchanged at -11 and 8 points respectively.

“Economic confidence is consistent with the positive news that we’ve had over the last few days from the country level, with industrial confidence leading the way in the improvement of overall economic confidence,” said Giada Giani, euro zone economist at Citigroup.

“Growth is likely to continue definitely for Europe,” she said.

But economists also warned against reading too much into the improved industrial confidence.

“The unexpected rise in sentiment does not signal a renewed pick up in economic activity, as the series tends to lag changes in GDP growth,” said Aline Schuiling, senior economist at ABN AMRO Bank NV.

“The composite Purchasing Managers’ Index, which was published last week and fell noticeably in October, is a much better tracker of GDP growth and currently is at levels consistent with growth of around 0.3 percent quarter-on-quarter, significantly lower than the 1 percent we saw in the second quarter,” she said.

“This is in line with our scenario for the euro zone economy, of moderate but ongoing expansion after a surprisingly good start to the year,” Schuiling said.

For full data see: here here

Inflation expectations in industry and among consumers remained unchanged, data showed on Thursday. ECONEZ

Economists said however, that there was still a risk to growth prospects from budget tightening planned by governments to regain debt market confidence and from the strength of the euro. EUR=

“Therefore there remains a compelling case for the European Central Bank to keep interest rates down at 1.0 percent not only at its November policy meeting next week but deep into 2011, especially as underlying inflationary pressures remain muted,” Archer said.

Reporting by Jan Strupczewski, editing by Marcin Grajewski/Ruth Pitchford

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