By Paul Hannon
Eurozone businesses and consumers became more upbeat in November, although manufacturers have cut their investment plans in what appears to be a response to growing uncertainty about the prospects for world trade.
A monthly survey carried out by the European Commission also had encouraging news for the European Central Bank as it prepares for its Dec. 8 policy meeting, with consumer expectations of inflation over the coming 12 months hitting the highest level in over two years.
The survey found that while manufacturers were less upbeat than in the previous month, retailers and construction companies were more optimistic than in October, as were consumers.
As a result, the European Commission's Economic Sentiment Indicator--which aggregates business and consumer confidence--edged up to 106.5 in November from 106.4 in October, reaching its highest level since December, 2015. Nevertheless, the rise was weaker than expected, with economists surveyed by The Wall Street Journal having forecast an increase to 107.0.
Eurozone policy makers worry that the sharp depreciation in the British pound's exchange rate against the euro after a June vote to leave the European Union could weaken exports from the currency area to its second largest overseas market.
They are also concerned about signs of rising trade protectionism around the world, as well as higher levels of political uncertainty across the eurozone, starting with a Dec. 4 referendum on constitutional reform in Italy and carrying on through French and German elections in 2017.
The resilience in the face of those risks shown in the November confidence survey suggests the eurozone's recovery may have strengthened slightly as 2016 draws to a close, albeit remaining modest.
But a separate, twice-yearly survey carried out by the commission in October and November found that manufacturers have cut back on investment plans since they were last questioned in March and April, and see only a modest revival in 2017.
"Real investment in the manufacturing industry is expected to increase by 1% in the euro area in 2016," the commission said. "This is a significant downward revision from the 6% growth managers had expected in the previous survey."
Across Europe, investment has recovered much more slowly since the financial crisis than in the U.S., a weakness many economists ascribe to persistently high levels of political uncertainty.
The sluggish pace of the eurozone's recovery is frustrating the ECB's efforts to boost inflation toward its target of just under 2%. Policy makershave expressed worries that after more than three years of very low inflation, households and businesses may grow used to small price rises, which would make the central bank's task even more difficult.
But the commission's survey found that households expected prices to rise more rapidly over the coming 12 months than they have in any month since August 2014, while businesses also expect to raise their prices more rapidly.
"That's encouraging for the ECB but, given that the indicator remains at low historical levels, it is not enough to indicate the sustained rise in the path of inflation that will be required to change the monetary policy stance," said Peter Foley, an economist at Credit Suisse.
Most economists expect the ECB to extend its bond-buying program, which is due to expire in March 2017, at its December meeting.
Write to Paul Hannon at email@example.com
(END) Dow Jones Newswires
November 29, 2016 10:50ET (15:50 GMT)
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