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Upward Trend In Eurozone Economic Sentiment Continues

Eurozone flag1 28Nov13

The continued upward trend in Eurozone economic confidence in November boosted prospects for future employment and investment, and further alleviated fears of a slow recovery, a closely-watched survey showed Thursday.

However, data from the European Central Bank revealed subdued lending to the private sector, underscoring the financing problems in peripheral economies.

Driven by the improvement in services and industry, the economic confidence index rose more-than-expected to 98.5 from 97.7 in the prior month, a report from the European Commission revealed. The expected score for November was 98.

Confidence in industry rose to -3.9 from -5 in October. The increase of 1.1 points in industrial confidence resulted mainly from an improvement in managers' assessment of the current level of overall order books, data showed.

At -0.8, services confidence registered a strong increase of 2.9 points, resulting from far better assessments of past demand and the past business situation.

Meanwhile, consumer confidence declined 0.9 to -15.4 in November, putting a halt to the upward trend observed since December 2012.

November's dip in consumer confidence reinforces suspicion that Eurozone consumers will likely remain generally pretty cautious in their spending in the near term at least which will hardly help growth prospects, said IHS Global Insight's Chief European Economist Howard Archer.

Retail trade confidence remained broadly unchanged at -7.7, resulting from an important improvement in managers' business expectations, which was offset by worsening views on the volume of stocks.

Another report showed that the business confidence index rose for the seventh successive month in November, turning positive for the first time since March 2012. The index came in at 0.18 compared to -0.08 in October.

The assessments of past production, the level of overall order books and export order books improved sharply in November. Also production expectations increased, though to a lesser degree, while managers' assessment of the stocks of finished products remained broadly unchanged.

Monthly data from the European Central Bank today showed that loans extended to the private sector declined 2.1 percent year-on-year, following a 2 percent fall in September.

Meanwhile, loans to households gained 0.1 percent and lending for house purchase rose 0.9 percent. Annually, total credit granted to euro area residents was down 1 percent in October from last year compared to a 0.8 fall in the previous month.

The broad money supply growth slowed to 1.4 percent in October from 2 percent in September.

Ben May, an economist at Capital Economics said the latest monetary data support the view that the recovery will remain weak and that the ECB may eventually be forced to take more decisive action to support the economy.

In the Financial Stability Review released on Wednesday, the ECB said stress indicators and Eurozone fundamentals suggest alleviation of financial market tensions, especially on the banks' funding side.

That said, financial stability conditions remain fragile and euro area adjustment process is incomplete, the central bank added.

Yesterday, ECB Vice President Vitor Constancio said the central bank would consider a negative deposit rate only in an extreme situation. The deposit rate is already at zero and policymakers including the ECB Chief Mario Draghi have said the bank is ready to take it lower, if needed.

Peter Vanden Houte, an ING Bank NV economist, does not expect a new rate cut in the near future and a negative deposit rate is still considered as a dive into uncharted waters. But the economist believes that some initiative to ease credit conditions in peripheral countries is still likely.

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