Eurozone confidence up on recovery hopes[fr][de] 

The European Commission predicted the worst could be over for the 16-country currency area, with some other surveys showing improvements, but its top economic affairs official cautioned that growth would be fragile and unemployment high.

A monthly survey  by the Commission, the European Union's executive arm, showed economic sentiment in the euro zone rose more than expected to 73.3 points in June from 70.2 in May.

In a separate, quarterly report , the Commission said the recession had probably passed its lowest point though growing unemployment posed a threat to recovery, which was likely to come only next year.

"The worst seems to be behind us in terms of GDP contraction, and our spring forecast predicts a subdued recovery for 2010," it said.

But EU Monetary Affairs Commissioner Joaquin Almunia said any growth would be low and joblessness would continue to increase from current record highs, so Europe needed reform, rigorous bank testing and political coordination.

"You can see that Europe will not have the growth potential it had before the crisis," he told a financial forum organised by Spain's Cinco Dias newspaper.

But the stock market took cheer from the economic data, with the FTSEurofirst 300 index rising 1.7%. 

The economic sentiment indicator improved from a trough of 64.6 points in March. Analysts polled by Reuters had expected an increase to 70.8 points.

"We have seen a turnaround in economic sentiment. We see a strong improvement in June, more than expected. It's still below the normal level, but it's going in the right direction," said Christoph Weil, an economist at Commerzbank.

Bayerische Landesbank economist Joerg Angele said the data heralded a slow recovery and expected the European Central Bank to keep interest rates low until the middle of next year.

The Commission said the sentiment improvement was fuelled by the services sector, consumers and, to a lesser degree, industry. Morale in the construction sector stagnated and fell in the retail sector.

"However, the level is still below the lows reached in the previous trough at the end of 1992," the EU executive said.

The Commission and analysts are worried that the eurozone's unemployment rate, which jumped to 9.2% in April, its highest in nearly 10 years, will continue to increase, undermining consumer demand.

Deflation spectre

The Commission's survey confirmed deflationary pressure in the euro zone, where consumer prices remained unchanged in May and are expected to fall. The EU's statistics office will publish its eurozone inflation estimate for June on Tuesday.

Inflation expectations 12 months ahead among households fell again in June to set a new low of -9 points from a downwardly revised -8 points in May, marking the third consecutive month of expectations of falling prices.

But selling-price expectations among manufacturers increased to -11 from May's -12.

The ECB watches inflation expectations closely in its policy decisions, aiming to anchor them at its price stability target of inflation just below 2%. It has cut its main rate to a record low of 1.0%.

"It is [...] imperative that the European Central Bank does not rule out taking further efforts to boost eurozone economic activity," said Howard Archer, chief European economist at IHS Global Insight.

Separately, the Commission said its business climate indicator rose to -2.97 in June from a revised -3.11 for May, fractionally above expectations but still at historically low levels.

The Commission said the rise in the indicator reflected more optimism among managers about production expectations and stocks of finished goods. But their view about order books and export orders books reached new historical lows.

Earlier on Monday, the Conference Board research group said its leading economic index for the euro zone rose 1.9% to 95.4 points in May, also suggesting that the currency area's economy may be bottoming out.

(EurActiv with Reuters).