Euro-Area Economic Confidence Rises More Than Forecast

Economic confidence in the euro area rose more than economists forecast in January, adding to signs that the 17-nation currency bloc may be emerging from a recession.

An index of executive and consumer sentiment rose to 89.2 from a revised 87.8 in December, the European Commission in Brussels said today. That’s the highest since June. Economists had forecast an increase to 88.2, according to the median of 30 estimates in a Bloomberg News survey.

The euro strengthened above $1.35 for the first time since 2011 before today’s report and traded at $1.3556 at 12:14 p.m. in Brussels, up 0.5 percent on the day. European Central Bank President Mario Draghi said last week economic activity is “stabilizing at a very low level” and Germany’s Bundesbank expects Europe’s largest economy to rebound in the first quarter from a contraction at the end of 2012.

“The series of positive surprises on euro-zone survey releases in January support our growth scenario,” Evelyn Herrmann, European economist at BNP Paribas SA in London, wrote in an e-mailed note. While leading indicators “are still at levels in line with contraction,” she wrote, “their upward trend supports our forecast of a slowdown in the pace of contraction” from 0.4 percent in the fourth quarter to 0.1 percent in the first three months of this year.

Spain’s Recession

The euro-area economy shrank 0.1 percent in the third quarter after a 0.2 percent contraction in the three previous months. Gross domestic product probably fell another 0.4 percent from October to December and will stagnate in the first quarter of 2013, according to another Bloomberg survey. The European Union’s statistics office in Luxembourg is due to publish GDP data for the fourth quarter on Feb. 14.

Spain’s recession deepened more than economists forecast in the fourth quarter as the government’s struggle to rein in the euro region’s second-largest budget deficit weighed on domestic demand. Gross domestic product fell 0.7 percent in the three months through December, more than the 0.6 percent contraction the Bank of Spain predicted on Jan. 23.

A gauge of sentiment among European manufacturers improved to minus 13.9 from minus 14.2 in December, today’s report showed. An indicator of services confidence rose to minus 8.8 from minus 9.8, while consumer sentiment climbed to minus 23.9.

While policy makers are cautious to call an end to the three-year-old debt crisis in the euro area, they are starting to become more optimistic.

Software Maker

“The fire is under control,” German Deputy Finance Minister Steffen Kampeter told the BBC in a radio interview broadcast yesterday. “But we have to take care it will not start again.”

SAP AG, the biggest maker of business-management software, on Jan. 23 forecast at least a 12 percent gain in full-year earnings as the company adds Internet-based programs to attract users.

Elsewhere in Europe, U.K. mortgage approvals rose more than economists forecast in December in a sign the Bank of England’s credit-boosting program is having an impact on home loans.

In Asia, Chinese incomes rose faster in the countryside than in cities for a third straight year in 2012 as migrant workers boosted their pay and the government strengthened the social safety net. The Thai economy expanded 5.7 percent last year, driven by recovery of manufacturing sector after floods, strong domestic consumption and exports.

U.S. Growth

The U.S. economy probably grew in the fourth quarter at the weakest pace in almost two years as a pickup in spending drained inventories and exports slumped, economists said before a report today.

Europe’s financial markets have calmed and stocks have rallied since Draghi in July announced the ECB’s bond-purchase plan. While this has reduced the probability of a breakup of the common currency, the economic environment still remains “challenging,” ECB Executive Board member Peter Praet said yesterday.

The Frankfurt-based central bank estimates the euro-area economy will shrink 0.3 percent this year before finding its way back to a full-year growth rate of 1.2 percent in 2014. The unemployment rate rose to a record 11.8 percent in November and economists forecast another increase to 11.9 percent in December, according to the median of 34 estimates in another Bloomberg News Survey.

‘Confidence Trick’

“Thanks to Mario Draghi’s confidence trick, the euro zone has recently gone through a period of calm,” Carsten Brzeski, senior economist at ING Group in Brussels, wrote in a note. “Financial markets are cheerful, private capital is returning to euro-zone peripheral countries and structural reforms seem to bear some fruits. This is what Mario Draghi called ‘positive contagion.’”

Yet today’s confidence report shows that this contagion hasn’t yet reached the real economy, Brzeski wrote. “It is a painful reminder that stabilization does not automatically lead to a recovery,” he wrote. “The road towards restoring growth in the euro zone still seems to be a long one.”

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