Eurozone Confidence Hits Post-Crisis High -- 3rd Update

By Paul Hannon Features Dow Jones Newswires

Eurozone businesses and consumers were more optimistic in June than at any time since before the global financial crisis, reflecting a pickup in economic growth and voters' recent rejection of political parties hostile to the European Union.

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The European Commission's Economic Sentiment Indicator, which aggregates business and consumer confidence, jumped from 109.2 in May to 111.1 -- its highest level since August 2007. Economists surveyed by The Wall Street Journal last week had expected a more modest rise to 109.5.

The surprisingly strong improvement should aid the eurozone's recovery, since businesses and households are likely to spend more freely if they feel more confident. That increases the likelihood that the European Central Bank will soon step back from the economic stimulus measures it has provided since mid-2014.

"Political winds are becoming tailwinds," ECB President Mario Draghi said in a speech Tuesday. "There is newfound confidence in the reform process, and newfound support for European cohesion, which could help unleash pent-up demand and investment."

June's rise in sentiment was aided by France, where the country-specific reading climbed to 109.8 from 107.6 in May. This was in response to Emmanuel Macron's victory in May's presidential elections and the strong showing of his party in subsequent legislative polls. The pro-EU centrist has pledged to remake the country's aged labor regulations and give the eurozone's second-biggest economy the vigor it has long lacked.

Speaking in London after an ECB gathering of policy makers in Portugal, Federal Reserve Bank of St. Louis President James Bullard said he had detected a new sense of optimism following Mr. Macron's victory, which may open the way for changes to the way the currency area's economy is managed.

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"You have a sort of springtime here in which there will be renewed efforts on the European project, to move it forward," he said.

Other large eurozone countries also saw big jumps, including Germany and Spain.

Manufacturers across the 19-country currency bloc were particularly upbeat -- a mood echoed by Germany's VMDA engineering federation, which Thursday raised its sector output forecast, citing better-than-expected demand from the eurozone and Asia.

"Everything is in place for a new upswing," VDMA Chief Economist Ralph Wiechers said.

The pickup in confidence has coincided with renewed optimism about the future of the EU. Pessimism about the bloc's prospects grew in the wake of the financial crisis and revived in 2016 after Britons voted to leave the EU. But the first half of 2017 saw a change in outlook, with the commission's biannual Eurobarometer survey recording that 56% of the 28,007 people questioned between May 20 and May 30 felt optimistic -- the highest proportion since early 2015.

That revival is something of a surprise. Coming into 2017, nationalist political parties that were hostile to both the bloc and the euro appeared to have momentum, while the U.K.'s Brexit vote was a major blow.

However, those anti-euro forces failed to make a great deal of headway with the public, and there was a firming in the eurozone's recovery and a continuing fall in unemployment. In the Eurobarometer survey, 46% of respondents described the EU's economic situation as "good," the highest proportion since before the global financial crisis.

The ECB has referenced the return of optimism as one reason for its improved view of the eurozone's economic prospects. Indeed, the pickup in confidence is consistent with other signs that economic growth sped up in the three months through June, having already accelerated in the first quarter.

On Tuesday, Mr. Draghi hinted that the central bank might start winding down its stimulus in response to accelerating growth.

But the ECB views strengthening growth as a means to its end of raising inflation to just below 2% and it doesn't expect to meet that goal within the next three years.

"June's EC business and consumer surveys point to a sharp acceleration of eurozone growth, which will increase speculation about ECB asset purchase tapering to come and add to upward pressure on the euro," said Jessica Hinds, an analyst at Capital Economics. "But with inflation expectations still subdued, we doubt that the ECB will raise interest rates until 2019."

Other statistics released Thursday showed declines in the annual rate of inflation in Spain and Belgium. But the inflation rate picked up in Germany, to 1.5% in June from 1.4% in May.

Despite their optimism, neither eurozone businesses nor consumers expected a significant pickup in the pace of price rises over the coming year, according to the commission's survey.

Nina Adam

contributed to this article.

Write to Paul Hannon at paul.hannon@wsj.com

(END) Dow Jones Newswires

June 29, 2017 16:36 ET (20:36 GMT)