Euro zone economic sentiment hit 15-year lows in November and inflation expectations among companies and households fell off a cliff, boosting expectations of a bigger than half-point rate cut by the ECB next week.
A monthly European Commission survey showed that growing pessimism in industry and services pulled euro zone economic sentiment down to 74.9 points — the lowest reading since 74.2 recorded in August 1993 — from 80.0 in October.
Services and industry account for the bulk of euro zone gross domestic product, so the fall underlines economists' beliefs that the 15-country area's economy will shrink faster in the fourth quarter than it did in the second and third.
"The euro zone is in a deep recession, upping the pressure on the ECB to cut interest rates further," said Christoph Weil, economist at Commerzbank. "We envisage a first move next week on a scale of 75 basis points to 2.5 percent."
Ewald Nowotny, of the European Central Bank's Governing Council, was quoted as saying on Thursday that the bank had room to cut rates because inflation was falling and the euro zone economy contracting, but he did not indicate the cut's size.
ECB council member Axel Weber, on the other hand, asked in a newspaper interview on Wednesday whether market expectations that rates would be at 2.5 percent by mid-2009 were right, answered:
"The course we've taken has been correctly appraised by the market. I don't see any reason to comment on market expectations in detail."
ECB President Jean-Claude Trichet said on Wednesday the bank could cut rates next week as long as there was evidence that inflation pressures had eased — and the Commission survey showed inflation expectations plunged this month.
Selling-price expectations among companies fell to 1 point from October's 6 points and were well below the long-term average of 6. Consumer inflation expectations fell to 11 points from 19 and were also well below the average of 23.
The rapid fall in inflation expectations comes as no surprise after lower fuel costs brought inflation in the euro zone's biggest economy, Germany, down a full percentage point in November to 1.4 percent.
The European Union's statistics office, Eurostat, will publish its estimate of November euro zone inflation on Friday and the latest Reuters poll of economists expects a decline to 2.3 percent year-on-year from 3.2 percent in October.
THIRD CUT IS THE DEEPEST?
"The sentiment indicator adds to the case for a bigger rate cut from the ECB next week than we have seen up until now," said Nick Kounis, chief European economist at Fortis Bank.
The ECB cut interest rates in October and November by 50 basis points each time to the current level of 3.25 percent.
Some economists said an even deeper cut than 75 basis points would be better.
"(An) appropriate (move) would be up to 100 basis points, but that would be radical for the ECB — 75 basis points would be worth considering," said Holger Schmieding, economist at Bank of America.
A Reuters poll published on Wednesday showed that of 81 economists surveyed, 56 expected the ECB to cut rates by 50 basis points on Dec. 4, while 24 predicted a cut of 75 or 100 basis points. One analyst forecast a 25 basis point reduction.
Grim data since the start of November prompted Economic and Monetary Affairs Commissioner Joaquin Almunia on Thursday to change his 2009 growth forecast for the euro zone to a recession. He had previously predicted 0.1 percent growth.
The drop in economic sentiment was driven by a much sharper-than-expected decline in services sentiment, which fell to -12 points from -7 and in industry, which sank to -25 from -18.
"A particular concern is the collapse in industry sentiment which is, to put it bluntly, in meltdown," said Ken Wattret, economist at BNP Paribas.
Sentiment also deteriorated among consumers — to -25 from -24 points and in the construction sector, to -24 from -20.
Sentiment in the retail sector stayed at -13, but the Bloomberg euro zone retail purchasing managers' index fell to a seasonally adjusted 40.6 from 44.3 in October, suggesting the slump in retail sales accelerated this month.
On the bright side, unemployment in Germany fell more than expected in November to its lowest level since December 1992, but economists cautioned these were probably the last of the strong figures for the labour market.
"The falling momentum suggests that the labour market will be affected next year by the recession and financial market crisis," said Commerzbank economist Eckart Tuchtfeld, forecasting a rise in the number of jobless in 2009.
