EU Sentiment at 17-Year High

Economic confidence in Europe hit a seventeen year high this month, according to a benchmark survey from the region's executive branch, as growth and employment dynamics continue to improve in the so-called 'Euroboom'.

The European Commission pegged its Economic Sentiment barometer at 114.6 points in November, up 0.5 points from the previous month and the highest reading since October 2000, TheStreet reported.

The commission also said consumer confidence jumped 1.2 points on the month and sits well ahead of its long-term average. The figures follow a series of above-expectations readings of the health of the eurozone economy as growth rates look poised to overtake those in the United States as the European Central Bank vows to hold key rates at close to zero while continuing to support the broader financial system with asset purchases and bank-sector liquidity.

The euro was marked 0.05% higher against the US dollar at 1.184 following the data release, with price support also coming from stronger-than-expected readings for state inflation statistics in Germany ahead of the formal nationwide release later Wednesday.

Interestingly, the commission survey noted a sharp surge in industry and consumer selling price expectations in its comprehensive poll and said they "decreased slightly in retail trade and services and remained virtually unchanged in construction."

Those figures could prove important in calibrating the next policy move from the ECB, which, unlike the US Federal Reserve, is tasked only with maintaining price stability, which it defines as an inflation rate that sits "close to but just below" 2%.  Annual inflation was pegged at 1.4% last month, the region's official statistics office said, while core consumer prices, which strip out volatile food and energy components, slowed to 0.9%.

Consumer Prices Remain Tepid

Earlier this month during his regular appearances before the Economic and Monetary Affairs Committee of the European Parliament, ECB President Mario Draghi repeated his view that consumer prices in the currency area remain tepid and haven't translated into faster wage growth despite an improving labor market and solid economic growth.

He also indicated that the bank's €2.4 trillion ($2.8 trillion) quantitative easing program was "flexible enough" to be adapted if geopolitical risks were to cause tighter financial conditions in the eurozone.

"Despite the firm economic recovery, inflation dynamics have yet to show convincing signs of a self-sustained upward trend. Headline inflation was 1.4% in October and is expected to temporarily decline towards the turn of the year, mainly owing to a weaker energy component as a result of base effects," Draghi said. "Underlying inflation pressures are still subdued as labor market slack remains significant. The improvements in labor markets that we have observed still need time to translate into more dynamic wage growth."

SMEs Report Profit Growth

Profits are climbing at more of the eurozone’s small and medium-sized businesses than at any time at least since the financial crisis of 2007-8, according to the ECB.

The ECB’s semi-annual survey of small businesses’ financing conditions between April and September found that, for the first time since the surveys began in 2009, more companies reported an increase in profits than a decrease.

The proportion of firms reporting rising revenues also climbed, and for the first time on record more firms reported growth than declines in every country in the eurozone–even Greece. The figures are based on questions to more than 11,000 small and medium-sized businesses, the vast majority of which have fewer than 250 employees.

The broad-based nature of the improvement was also reflected in figures on credit availability. Firms reported an improved availability of bank loans across the continent, with the biggest improvements in some of the economies that were hardest-hit during the crisis–Spain, Portugal and Ireland.

Risks Aplenty

Risks to eurozone financial stability remain contained, supported by an ever-broader economic expansion, even if the bloc continues to face a list of vulnerabilities, the ECB said.

“Improved economic conditions underpin the assessment that there is no generalized overvaluation in eurozone financial markets,” the ECB said. “Nevertheless, global risks in particular may trigger financial asset market corrections with negative repercussions on financial stability.”

Top vulnerabilities include an abrupt repricing of global risk premia, weak bank sector profitability, renewed public debt concerns and liquidity risks in the non-bank financial sector, the ECB said in a biannual report.