European July Economic Confidence Increases More Than Forecast

By Jurjen van de Pol

July 30 (Bloomberg) -- European confidence in the economic outlook increased more than economists expected in July, adding to signs the deepest recession in more than six decades may be bottoming out.

An index of executive and consumer sentiment in the 16 nations that use the euro rose to 76, the highest since November, from 73.2 in June, the European Commission in Brussels said today. Economists had forecast an increase to 75, according to the median of 24 estimates in a Bloomberg News survey.

The growing confidence is the latest evidence that Europe may have seen the worst of the recession as indications of a global recovery improve prospects for the region. Stocks rose around the world as companies from Alcatel-Lucent SA to Honda Motor Co. reported earnings that beat analysts’ estimates.

“We are getting a step closer to the end of the recession, although there remains a risk of a renewed setback,” said Martin van Vliet, an economist at ING Groep NV in Amsterdam.

Paris-based Alcatel-Lucent, the world’s largest supplier of fixed-line phone networks, today posted its first profit in 11 quarters, aided by cost cuts. Jeronimo Martins SGPS SA, Portugal’s biggest retailer, on July 27 reported first-half earnings that beat some analysts’ estimates as it profited from improved margins at its Portuguese retail business.

Even as signs mount that the worst of the recession is passed, unemployment in Germany, Europe’s largest economy, rose this month as companies cut jobs to protect profits, the Federal Labor Agency said today. With rising unemployment curbing consumer spending, European retail sales fell for a 14th month in July, the Bloomberg purchasing managers index showed today.

Capacity Utilization

Euro-area capacity utilization for the current quarter declined to 69.5 percent, the lowest since the data series began in 1990, the European Commission said in its report today.

The European Central Bank expects the region’s economy to resume expansion in the middle of next year. The ECB, which has pumped billions of euros into markets to support lending, kept its benchmark interest rate at a record low of 1 percent on July 2 and has started buying as much as 60 billion euros ($84.4 billion) of covered bonds, securities backed by mortgages and public-sector loans.

“After a phase of stabilization, a phase of recovery is expected around mid-2010,” ECB President Jean-Claude Trichet said on July 2. “The current rates are appropriate,” he said, adding that inflation pressures will be “dampened.”

Price Expectations

Today’s report showed that consumer sentiment in the euro region improved to minus 23 in July from minus 25 in June. A measure of manufacturers’ confidence increased to minus 30 from minus 32, while confidence among retailers also improved.

A gauge of consumers’ price expectations declined to minus 12, the lowest since the data were first collected in 1990, according to the commission.

Euro-area consumer prices may have fallen 0.4 percent this month from a year earlier, economists forecast in a Bloomberg survey. While falling prices enable consumer to buy more, rising job insecurity may curb spending.

“We still have a substantial increase in unemployment ahead of us, which could hamper the recovery of consumer sentiment,” said Van Vliet at ING.

Europe’s unemployment rate may rise to 9.7 percent in June, the highest in more than 10 years, according to the median forecast of 24 economists in a Bloomberg survey. The European Union statistics office in Luxembourg will publish the jobless and inflation data tomorrow at 11 a.m.

To contact the reporter on this story: Jurjen van de Pol in Amsterdam jvandepol@bloomberg.net