(RTTNews) - Eurozone economic sentiment strengthened more than expected in October pointing towards a possible recovery in the third quarter.

Economic sentiment stood at 86.2 in October, up from 82.8 in September, a monthly survey from the European Commission revealed Thursday. The reading stood above the expected 84.4 and was the strongest since September 2008.

Commerzbank analyst Christoph Weil said in a note that economic sentiment will continue to rise towards 100, irrespective of how buoyant the upturn really turns out to be. The real economy will still be feeling the after-effects in 2010, in the form of more value adjustments in the banking sector and continuing corporate restructuring.

The improvement in economic sentiment in October was the seventh consecutive increase. Martin van Vliet, an economist at ING said, “This raises the prospect that the likely return to positive GDP growth in the third quarter will be sustained in fourth quarter.”

In October, the largest contributor to the overall increase was industrial confidence, which rose three points to minus 21. The expected reading was minus 22. The survey found that it was the strongly optimistic production expectations that really lifted sentiment. Further, respondents were clearly more positive in their appraisal of order books and the level of stocks. Last week, a survey by Markit Economics showed that Eurozone private sector output rose at its fastest pace since December 2007 with the manufacturing sector expanding for the first time in seventeen months and services sector maintaining growth.

Driven by the more optimistic general economic outlook, consumer confidence edged up a point to minus 18 in October, in line with consensus forecast. Meanwhile, confidence in services came in at minus 7 versus minus 9 in the prior month. The reading was above the expected level of minus 8. Retailers’ confidence remained unchanged at minus 15.

Confidence in financial services that is excluded from the ESI, stabilized after the strong increase recorded in September, mirroring a slight improvement in the business situation, while expectations of demand decreased marginally.

In a separate communique, the European Commission said the business climate indicator came in at minus 1.78 compared to minus 2.07 in September. The level of the BCI was worse than the minus 1.9 expected and continued to remain very low, suggesting that annual growth in industrial production was still negative in September.

Commerzbank’s Weil holds the view that the European Central Bank would maintain the interest rates at the current low level until it sees clear signs of sustainable recovery. Meanwhile, the ING economist noted that economic sentiment index remains well below it long-term average of 100, which also happened to be the level seen at the onset of the ECB’s previous rate hiking cycle in December 2005.

On October 8, the ECB Governing Council, led by President Jean-Claude Trichet, had left its key interest rate, which is the interest rate on main refinancing operations, at 1%. The central bank maintained the rate unchanged at a record low for the fifth month in a row.

Lending to Eurozone firms and households registered its first annual fall on record in September, central bank data showed earlier in the week, validating the central bank’s highly cautious policy stance. Meanwhile, broad money supply grew at the slowest pace since the creation of the single currency. However, according to the central bank’s latest lending survey, the euro area banks expect a slight net easing of credit standards for loans to enterprises and households in the fourth quarter.

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Posted in Categories: Economy, Eurozone, Forex, Releases.

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