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UPDATE 1-French pessimism holds back rise in euro zone morale

Robin Emmott
Thursday, 28 Nov 2013 | 6:22 AM ET

* Confidence rises in services, industry in November

* Pessimistic France falls behind Germany, Spain and Italy

* ECB remains under pressure to support the recovery

BRUSSELS, Nov 28 (Reuters) - Most Europeans felt more optimistic about a recovery in the euro zone in November, but pessimism in France underlined the sluggish performance of the bloc's second-largest economy.

Economic sentiment in the 17 countries using the euro strengthened by 0.8 points to 98.5 in the seventh straight month of gains, according to a European Commission survey on Thursday, beating economists' expectations.

The business climate reading turned positive for the first time since March last year.

But loans to households and companies in the euro zone shrank at a sharper pace in October, European Central Bank data showed, keeping pressure on policymakers to do more to buoy the recovery.

The euro zone is trying to pull out of a deep banking and public debt crisis that nearly shattered the currency area.

Record unemployment and a shortage of bank lending are a serious drag on a recovery that began earlier this year.

But the business survey showed that of the euro zone's five largest economies, only French morale slipped, while sentiment in Italy, Spain, the Netherlands and Germany continued to strengthen.

"The numbers are very encouraging given that in October there were signs that the economic upturn was stalling," said Sarah Hewin, head of European research at Standard Chartered. "We shouldn't downplay the importance of France, but this suggests momentum is picking up," she said.

French business activity shrank in November, as high labour costs and a lack of reforms hurt exports.

French pessimism was most notable in the European Commission's measure of euro zone consumer sentiment, which declined this month, halting an upward trend over the past year.

"This was mainly due to a sharp decline registered in France and reflected worsening expectations about the future general economic situation," said the Commission, the EU executive arm.

Standard & Poor's cut France's credit rating earlier this month by one notch to AA from AA+ and the Commission sees France expanding by 0.2 percent in 2013 and 0.9 percent in 2014.

ECB MAY STILL MOVE

Despite a return to economic growth in the April-to-June period, the economy barely grew in the third quarter and economists say the European Central Bank will have to do more to support growth.

Spain, which emerged from a two-year recession in the July-September period, saw economic sentiment increase by 1.4 points in November.

That was a stronger reading than in Germany, the euro zone's biggest economy, and showed Spain regaining the business dynamism it lost during a decade-long property boom that eventually burst and forced a euro zone bailout of its banks.

Overall, the bloc's services sector registered a nearly 3-point jump in November. Confidence in industry also rose in the euro zone, but fell in construction and financial services.

Paris-based think tank the Organisation for Economic Cooperation and Development called on the ECB last week to emulate U.S.-style quantitative easing, or QE, and the bank's vice-president has said all options are open.

Inflation in the 17-nation euro zone fell to its lowest in nearly four years at just 0.7 percent in October, prompting the bank to cut rates to a record low of 0.25 percent.

"This month's rate cut was probably not the final move from the ECB to fight the crisis," said Peter Vanden Houte at ING.