Euro zone economic sentiment sank to an almost seven-year low in September, underlining a growing risk the economy will fall into recession, data showed today.
Furthermore, the survey may not have captured the impact of the deepening financial crisis in the wake of Lehman Brothers' collapse on Sept. 15 and the subsequent market turbulence, because it was conducted in the first two weeks of September.
The monthly survey by the European Commission for the 15 countries using the euro showed economic sentiment fell to 87.7 points, marginally higher than market expectations of 87.5 points, from 88.5 in August.
It was the indicator's lowest reading since the 86.6 points recorded in November 2001.
"The figures are as bad as expected, with a clear weakening of confidence almost across the board except for consumer confidence, which has stabilised thanks to lower oil prices," said Holger Schmieding, co-head of Europe economics at Bank of America.
"This, especially the reading for services, adds to the risk that the euro zone economy will be in recession late this year," he said. Consumer sentiment remained stable at -19 points as expected and industry sentiment fell to -12 points from -9 points.
The indicator for the services sector, which produces two thirds of the euro zone's gross domestic product, fell to zero from 1 point in August.
The growing risk of recession, exacerbated by the growing market turmoil, is likely to trigger interest rate cuts eventually from the European Central Bank, economists said.
The ECB wants to keep inflation expectations low to avoid a wage-price spiral caused by high oil and food prices. It raised interest rates to 4.25 percent from 4 percent in July to make sure such so-called second-round effects did not happen.
The Commission survey showed, however, that consumer inflation expectations fell sharply to 17 points from 22 points last month after peaking at 30 in July. Selling-price expectations among producers fell sharply to 12 points from 17, down for the second month running.
"One important thing to focus on is that consumer inflation expectations have fallen - that perhaps gives the ECB more comfort," said Sunil Kapadia, European economist at UBS.
"We stick to our call for the ECB to cut rates by a total 75 basis points next year. In our view inflation has peaked ... and we don't see any significant sign of second-round effects materialising," he said.
Reuters