Economic sentiment in the European zone rose to a seven-month high in January on higher confidence across all sectors except construction, with inflation expectations among consumers and companies both falling sharply.
The European Commission's Economic Sentiment Index (ESI) rose to 99.9 this month, above an upwardly revised 97.1 in December, the index's highest reading since June 2022.
The growing confidence underscores expectations that the economic downturn in the European zone is likely to smack down even though it is stuck with factors such as energy prices and the cost of living crisis and the war in Ukraine.
Paolo Grignani, economist at Oxford Economics, said the increase confirmed that the worst is over for the European zone with improving sentiment, and better economic growth prospects. These two factors are likely to keep the European Central Bank raising interest rates to curb inflation that exceeded 9% in December against the bank's target of 2%.
"A gradual increase in confidence is likely to convince the ECB of the need for more hikes in the coming months," Grignani said.
The Commission's monthly survey showed inflation expectations among consumers fell to 17.7 in January from 23.2 in December, well below the long-term average of 20.0, a trend likely to please the ECB.
Expected sales prices among manufacturers also fell sharply to 31.9 in January from 37.8 in December in a sign of inflationary pressures at the beginning of the plan also receding.
The commission reported confidence in industry rose to 1.3 from -0.6 in December and in services to 10.7 from 7.7. Sentiment among consumers improved to -20.9 in January from -22.1 and for the retail sector the reading was -0.8 from -2.7.
