2010.07.2909:10:00UTC+00Eurozone July Economic Sentiment Hits 28-Month High, Tops Expectations

Eurozone economic sentiment rose to a 28-month high in July, driven by strong performance in Germany. Although the data from European Commission suggests a pick up in Eurozone economic growth, activity is likely to moderate over the coming quarters.

The economic sentiment indicator rose to 101.3 in July from 99 in June, a monthly survey from the European Commission showed Thursday. It was higher than economists' forecasts for a score of 99.1 and the strongest since March 2008.

The strong pick-up in economic sentiment in July confirms that the spillover effects from the sovereign debt crisis to the overall economy have been limited thus far, said Martin van Vliet at ING Bank NV. "With global growth momentum showing signs of slowing and domestic demand still lacklustre, the Eurozone recovery is bound to lose steam in the second half of this year," the economist added.

The EC's indicator for consumer confidence rose to minus 14 from minus 17 in June, broadly in line with preliminary estimates. More optimism about the general economic situation and easing unemployment fears in Germany contributed to the improvement.

There are more encouraging signs for the euro-zone, according to Jennifer McKeown at Capital Economics. "But the recovery will need to spread to domestic spending and the periphery if it is to be sustained," the economist noted.

Meanwhile, manufacturing sentiment rose slightly to minus 4 from minus 6, missing expectations for a reading of minus 5. Most respondents in this sector reported substantial improvements in their order books. But, managers were cautious on their production expectations.

The momentum in the economic growth is set to moderate in the coming quarters, Chiara Corsa at UniCredit Research said. The economist sees the boost from both exports and inventories gradually fading throughout the second half of the year, with domestic demand unlikely to take up the baton.

Driven by brighter assessments of demand and the business situation over the past 3 months, sentiment among service providers improved by two points to 6. The expected reading was 5. Retailers and construction confidence climbed to minus 4 and minus 29, respectively. The survey found that upbeat business expectations in the U.K. and in Germany was the reason behind the rise in retailers' sentiment.

The European Commission, in a separate survey, showed an improvement in business confidence. The corresponding indicator for the euro area increased to 0.66 from 0.40. Economists were looking for a score of 0.39. The improvement in business sentiment suggests that economic activity in industry will continue to recover in the months ahead, although it has still some way to go to reach its pre-crisis level.

Business managers were upbeat about their order books and production trend observed in recent months. They were also more optimistic about their export order books. By contrast, managers' assessment of their stocks of finished products remained unchanged and their production expectations were cautious.

It remains to be seen to what extent higher confidence feeds through to lift activity, IHS Global Insight's Howard Archer said. Furthermore, the economist noted that Eurozone growth still seems at risk over the months ahead from tightening fiscal policy in a number of nations and a loss of momentum in global growth.

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