Data shows euro zone economy steadier, but still weak

Wednesday 30 January 2013 13.00
Latest euro zone figures show improving consumer optimism
Latest euro zone figures show improving consumer optimism

The euro area's economy is making faltering progress toward recovery.

The latest round of figures today showed improving consumer optimism and steadier bank finances - but weak demand for loans from businesses.

The European Union's economic sentiment indicator, which mixes business and consumer outlooks, rose by 1.4 points in January to 89.2 for the 17 EU countries that use the euro.

This was the third monthly increase in a row.

The jump was fed by increased confidence among consumers and from businesses in the construction and service sectors of the economy. Meanwhile, sentiment in industry and the retail trade remained broadly flat.

The survey is a modestly hopeful sign as the euro zone struggles to get out of a recession that saw its economy shrink in the second and third quarters of 2012.

A drawn-out crisis over too much government debt is weighing on growth as countries cut back on spending to reduce their deficits. But the sentiment indicator still remains well below its long term average of 100 for 1999-2012.

The European Central Bank expects the economy to shrink 0.3% throughout the course of 2013, but to make a modest recovery later on in the year.

Bank lending data from the ECB confirmed today that the recovery remains some way off. Its quarterly lending survey showed a "pronounced net decline" in business loan demand in the fourth quarter.

The main reason for the fall was that companies are not seeing a need to finance new fixed investment such as buildings and machinery, a key component of any economic recovery. The survey also shows banks continue to tighten credit standards.

The ECB survey of senior loan officers at 131 banks indicated that the banking system is on a steadier footing. Banks are now reporting better access to funds from deposits and borrowing.

Bank finances were hit during the euro zone debt crisis by losses on government bonds. This made it harder for them to borrow from other banks and bond investors due to fears they may not pay the money back.

Banks are also facing regulators' demands to hold back more money as a financial buffer against losses. These requirements could also mean that less money would be available to lend out.