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Eurozone economic sentiment slumps

Friday, June 27 11:40:52

Euro zone economic sentiment fell unexpectedly in June on fears that fighting in Iraq would push up oil prices and that any escalation of the Ukraine crisis could drag on euro zone growth.

The European Commission's economic sentiment index (ESI) for the 18 countries that share the euro fell to 102.0 from a revised 102.6 in May. Economists had forecast a rise to 103.0.

The decline was mainly due to a drop in optimism in the industry and construction sectors, and among consumers.

"Because this loss in momentum spreads across a large number of member states ... a common cause, ie geopolitical risks, seems likely," said Evelyn Herrmann, economist at BNP Paribas.

"Indeed, the potential of unexpected rises in oil prices driven by uncertainty in Iraq are a downside risk to growth. The potential for further sanctions on Russia is also a looming risk to the euro zone growth outlook."

The Commission's survey is typically carried out in the first half of the month, since when tensions have eased between Moscow and western countries over Ukraine, where an uprising by pro-Russian separatists has claimed hundreds of lives.

Oil prices have dropped nearly $3 from a nine-month high of $115.71 hit on June 19 as output from Iraq's major southern oilfields remained unaffected by fighting in the north and west.

The decline in economic sentiment confirms earlier poor data such as the Purchasing Managers Indexes (PMIs) and adds urgency to European Union leaders' attempts to accelerate growth.

"The good news from the euro zone is that the economy is growing again. The bad news is that growth is excruciatingly slow," said Christoph Weil, economist at Commerzbank.

Euro zone gross domestic product growth slowed to 0.2 percent quarter-on-quarter in the first three months of the year from 0.3 percent in the previous quarter.

Herrmann said that at current levels, the index still pointed to an acceleration of growth in the April-June period in the euro zone, although risks of a slowdown were growing.

"The ESI's Q2 average edged up 0.5 points q/q to 102.2, in line with our GDP growth forecast of 0.4 percent q/q. With surveys drifting slightly lower towards the end of Q2, however, the risks for a slower momentum in Q3 are rising," she said.

The Commission survey showed too that consumer inflation expectations 12 months ahead fell to 8.6 in June from 9.6 in May, continuing a trend started last October when the reading was at 16.8 and inflation started slowing sharply.

In contrast, inflation expectations among manufacturers improved to -0.1 in June from -1.3 in May. (Reuters)