Euro zone confidence at multi-year high, but inflation expectations fall

BRUSSELS (Reuters): Economic sentiment in the euro zone rose more than expected in December and the business climate indicator hit new highs, European Commission data showed on Monday, underlining robust economic growth in the single currency area.

The Commission’s economic sentiment indicator rose to 116.0 points in December from 114.6 in November and well above the 114.8 point expectation in a Reuters poll.

It was the highest value of the indicator since October 2000. The record was the 119.0 set in May 2000.

Separately, the Commission’s business climate indicator, which points to the phase of the business cycle, reached the highest value since measurements began in 1985, hitting 1.66, up from 1.49 in November.

Sentiment in the 19 countries sharing the euro was buoyed by a rise in optimism across all sectors – in industry, services, retail trade, construction as well as services.

But the upbeat mood, while pushing up producer price expectations among manufacturers, has failed to increase consumer inflation expectations which are key to boost inflation to the European Central Bank target of below, but close to 2%. Inflation eased to 1.4% last month from 1.5% in November.

The monthly Commission survey showed that consumers’ inflation expectation for the next 12 months fell to a four-month low of 13.6 points in December from 16.0 in November.

The slow price growth, which comes despite the euro zone’s strongest economic growth in a decade, may vindicate the ECB’s decision to keep its monetary policy easy despite growing pressure from Germany and other richer euro zone countries.

The ECB has said it would continue buying bonds at least until September and keep low interest rates “well past” then to raise inflation to its two% target even though policymakers from the Netherlands, Germany and other northern countries have voiced their worries about an overly easy policy while economic growth is strong. 

Capital Economics said in a note that, while there might be upside risks to its already above-consensus forecast of 2.3% economic growth this year in the euro zone, this would probably not prompt the ECB to adopt its dovish stance.