Eurozone economic growth may have passed its peak, data showed on Tuesday, but will be underpinned by rising consumer demand as unemployment falls, with interest rates set to rise as inflation rebounds.
Economic sentiment in the 13 countries using the euro eased for the second month running in July, the European Commission's monthly survey showed, mainly on weaker sentiment in industry, despite improvements in the retail sector.
The sentiment index, which reflects, rather than anticipates economic developments, eased more than expected in July to 111.0 points from 111.7 points in June, against market expectations of a decline to 111.2 points.
Economists said this was caused by higher interest rates, a stronger euro and a cooling of external demand, but they noted the index still remained well above its long-term average of 100.0, suggesting more good growth ahead.
"We believe these high levels of confidence are still consistent with above-trend growth in the euro area, but also acknowledge that we may be past the absolute peak in economic performance," Sunil Kapadia, European economist at UBS.
Commission data showed that capacity utilisation, measured on a quarterly basis, eased in July after seven straight quarters of rises, to 84.2 percent from 84.8 percent.
"That said, the level of the series remained extremely elevated, about matching the peaks of earlier cycles and not too far from the record high," said Silvia Pepino, Senior European Economist at J.P. Morgan. The record was 85.4 in February 1990.
The survey showed consumer optimism was unchanged at -2 points in July, well above the long-term average of -12, helped by low unemployment which in June was unchanged at a historic low of 6.9 percent. This pointed to more consumption ahead.
Economists said household spending was taking over from exports as the main engine of eurozone growth but that this may stoke inflation, which the European Central Bank wants to keep just below 2.0 percent. Higher interest rates would follow.
"Good news for growth, potentially bad for inflation, already expected to accelerate from September on the back of an unfavourable energy-related base effect. Overall, plenty of reasons for the ECB to keep tightening," said Aurelio Maccario, co-head of European Economics at UniCredit.
The European Union's statistics office estimated eurozone inflation at 1.8 percent year-on-year in July. The Commission survey showed consumer inflation expectations for the next 12 months were stable at below their long-term average while producer inflation expectations eased.
But economists said inflation would rebound from September onwards as most of the energy-related base effects which helped keep it in check in recent months would reverse. Faster price growth and still robust economic growth are likely to trigger more rate rises from the ECB, which has already raised them from 2 percent in 2005 to 4 percent in June.
Markets expect a hike in September or October, and again in December as growth continues, even if at a slightly slower pace. Also the IMF said in a statement it expected eurozone interest rates might rise further, even if wage deals have been surprisingly moderate to date.