Euro zone confidence on the up

City A.M. Reporter
Euro zone economic sentiment jumped to a 38-month high in December pointing to healthy growth in the last quarter of 2010, but also to a growing divergence between core and peripheral euro zone countries.

A monthly survey by the European Commission showed the economic sentiment in the 16 countries using the euro in December rose to 106.2 points from a downwardly revised 105.1 points in November.

Economists polled by Reuters had expected a rise to 105.5.

"The euro zone economy is likely to have posted healthy growth again at year-end 2010," said Christoph Weil, economist at Commerzbank.

Economists said the December sentiment indicator was consistent with economic growth of 0.4-0.5 percent quarter-on- quarter in the euro zone in the last three months of last year.

"The bad news is, the euro area remains deeply split economically. Peripheral countries cannot keep up with Germany's high pace of growth," Weil said.

The divide was underscored by German data on Thursday showing the country's manufacturing orders growing at the strongest pace in 10 months in November, rising far more than economists expected mainly thanks to strong demand for durable goods coming from outside the euro zone.

"It is emerging to be a very, very strong fourth quarter (for Germany)," said Rainer Sartoris at HSBC Trinkaus. "Export orders are coming above all from overseas. We are still dependent on what occurs in the emerging countries. Figures from the euro zone have a dampening effect."

The Brussels data showed economic sentiment rose in December in Germany, France and Italy, but declined in Greece and Spain. This complicates the European Central Bank's decision-making on interest rates for the euro zone in 2011, economists said.

With countries such as Greece, Ireland, Portugal and Spain struggling with market pressure to bring their public finances back in order, the ECB is more likely to hold its benchmark rate at its current record low of 1.0 percent, economists said.

"The ECB will show consideration on the crisis countries in its monetary policy decisions and not raise the key interest rate in 2011," Commerzbank's Weil said.

A further headache for the ECB in its monetary policy decisions will be the sharp rise of inflation expectations among consumers and businesses, the Commission data showed.

Consumer inflation expectations 12 months ahead surged to an index level of 15.0 from 10.7 in November, but remained below the long-term average of 20.6, the Commission said.

Eurostat data on Tuesday showed consumer inflation jumped in December to 2.2 percent, its highest level in more than two years, above the ECB's target of just below 2 percent.