Euro Zone Expectations Are Most Pessimistic on Record

Euro-zone investors are the gloomiest in 2-1/2 years and their expectations for the next six months are the most pessimistic on record as the credit crunch continues to depress sentiment, a survey showed on Monday.

A sentiment gauge based on a survey of around 2,600 European investors by the Sentix group in January posted its seventh consecutive decline, falling to 8.2 -- the lowest since July 2005 -- from 11.9 in December, Sentix said.

A measure of investor expectations for business activity over the next six months fell to -16.25, the lowest since the survey began in February 2003, from -12.5, while a gauge of current conditions slipped to 36.0 from 39.5.

Sentix said January's decline was a continuation of the downwards trend that started in the summer.

"The emerging U.S. credit crisis and its implications have since fed a growing sense of alarm," the group said.

"The steady nature of the deterioration is conspicuous and is accompanied by a high euro exchange rates and a crude oil price near $100," it added.

The survey, including around 575 institutional investors, was conducted between Jan. 3 and Jan. 5.

Inflation Fears

Meanwhile, the European Commission's economic sentiment indicator showed that euro zone economic sentiment held up better than expected in December thanks to increased optimism in the services sector, but costly energy boosted prices at factory gates, adding to ECB inflation worries.

The EC's economic sentiment indicator was vitually unchanged at 104.7 points last month from 104.8 in November, compared to market expectations of a decline to 104.3 points.

Economists said this pointed to some resilience in the economy, which is seen slowing this year because of the global credit crunch, expensive oil, slowing growth in the United States and a strong euro which undermines exports.

"The figures are not as much down as we had expected. There will be more weakness in the near future, although it is not as bad as we had feared," said Stephane Deo, economist at UBS.

The easing was mainly due to weaker sentiment in industry, retail trade, construction and among consumers. Sentiment in the services sector, which generates more than two thirds of the euro zone's gross domestic product, inched up.

Producer Prices Rise

The European Union statistics office said producer prices rose 0.8 percent month-on-month and 4.1 percent year-on-year in November, as expected, driven mainly by higher energy and non-durable consumer goods prices.

Unless absorbed by intermediaries, prices at factory gates are eventually passed on to consumers.

"At least though, there were only modest rises in the prices for durable consumer goods and capital goods, indicating that core inflationary pressures were still broadly limited," said Howard Archer, economist at Global Insight.

The Commission survey data also showed inflation expectations in December among producers rose to 13 from 12, staying well above the long-term average of 6 points.

Unemployment Stable

But inflation expectations among consumers, which the European Central Bank monitors in its interest rate decisions, were stable at an above average 28 points last month.

Average expectations, based on historical data, are 23; the maximum possible is 51 and the lowest possible is 2.

The Commission data showed that inflation expectations in the euro zone's biggest economy, Germany, fell strongly to 27 from 30 points and in the second-biggest, France, they plunged to 28 from 36. But in Italy, the zone's third-largest economy, they rose to 19 from 13.

Euro zone unemployment was stable at a historic low of 7.2 percent in November, Eurostat also said.

"The low unemployment rate and recent markedly higher inflation will maintain the ECB's concern that pay could move significantly higher across the Eurozone over the coming months," Archer said.