–Adds Data, Comments On Individual Sectors

May — MNI analysts survey — April Revised
lowest median highest from
————————————————————————
Econ Sentiment 98.4 97.9 100.2 101.5 100.6 —
Industry -6 -9 -7 -5 -7 —
Services +3 na na na +6 +5
Consumers -18 -20 -18 -16 -15 —
Retail -5 na na na -1 —
Construction -28 na na na -25 —
————————————————————————
Business Climate: +0.34 na na na +0.28 +0.23

PARIS (MNI) – Economic morale in the Eurozone eroded more than
generally expected in May, with declines in all sectors except industry,
the European Commission said Monday.

After an almost steady recovery from a record low of 68.0 in March
2009, the Commission’s sentiment indicator fell back 2.2 points in May
to 98.4, retracing most of the jump in April.

The sovereign debt crisis and the intensification of austerity
programs in many Eurozone countries have weighed on medium-term growth
prospects, even in Germany, and the Commission’s survey suggests that
the fallout for the real economy may be felt in the coming months.

For example, confidence in financial services, which is not
included in the ESI, deteriorated by four points. Managers were
particularly worried about the business situation. While their
assessment of past evolution of demand improved, they where pessimistic
about the future.

But sentiment in most other sectors also eroded markedly in May,
led by retailing. With consumer sentiment weakening, this will further
weigh on domestic demand.

The Commission noted that the latest survey results were influenced
by the change of classification of economic activities, leading to a
break in the series.

Internal checks “indicate that the changeover has affected the
level, making interpretation more difficult,” it said. “This level shift
did not, on the whole, affect the direction of the change, but only its
magnitude.”

On the positive side, sentiment in industry continued to recover,
gaining another point to stand two points above the long-term average.
With producers’ assessment of order books up four points and foreign
order books up two points, near-term output prospects gained one point,
surpassing the historical average by five points.

Still, the Commission’s survey continues to lag the factory PMI
polls, despite the 1.6-point setback in May from April’s 46-month high
of 57.6.

The Commission’s separate Business Climate Indicator recorded a
further rise as well (see below).

By contrast, service sector morale fell back three points after a
five-point leap in April. Providers said activity and demand had
weakened and expected these trends to continue in the near term.

The flash services PMI gained another 0.4 point in May to a
32-month high of 56.0.

As indicated by the Commission’s flash estimate, consumer sentiment
fell back three points after a two-point recovery in April and is now
three points below average. The drop was driven by sharply eroding
prospects for the economy, particularly in the southern European
countries.

Despite easing unemployment worries, more consumers also expected
their financial situation to deteriorate. This was no doubt also
influence by rising higher inflation expectations, which still remain
well below historical averages. Slightly fewer consumers expected to
make major purchases in the coming year.

Retail sentiment suffered the biggest setback in May, falling back
four points after a seven-point recovery since February. Retailers noted
a marked slowdown in current business, driven largely by a steep drop in
Italy. Expectations also weakened somewhat, while remaining slightly
above average.

Construction sector sentiment was dragged down by weaker activity,
orders and hiring prospects.

Sales price expectations rose in all key sectors except
construction. Gains were strongest in retailing, followed by industry
and the services. Still, apart from industry, where rising commodity
prices have the earliest impact, price expectations remained below
historical averages.

The Commission’s separate Business Climate Index rose for the 14th
straight month by another 0.06 point to a 23-month high of +0.34. Here
again the Commission cautioned that the shift in classifications had
affected the magnitude of the monthly change but not its direction.

–Paris newsroom +331 4271 5540; e-mail: stephen@marketnews.com

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