Bottomed Out?

The 16-member euro zone might still be in the grip of a severe economic slump, but signs have emerged that the downturn that has engulfed the currency bloc in recent months could be reaching its low point.

The latest batch of evidence that the round of hefty global interest rate cuts, falling oil prices and government stimulus packages are helping to raise hopes of an economic pickup later in the year came Friday, Jan. 23, with the release of two key euro-zone indicators.

Better times ahead?

The purchasing managers' indices (PMIs) for the euro zone's manufacturing and service sectors posted surprise increases in January. Additionally, Belgium's key economic sentiment indicator rose slightly this month, ending four months of steep falls. Analysts had forecast a decline in the indicator.

"Was this the bottom?" asked ING economist Carsten Brzeski following the release of the PMIs, which came amid the release of a slew of key economic sentiment indicators.

Many economists believe that the euro zone economy possibly reached its nadir as 2008 came to a close and expect the currency bloc to gain traction in the second half of the year before experiencing a recovery in 2010.

"The low point in the cycle is now," said Rainer Guntermann, senior euro-zone economist with the investment house Dresdner Kleinwort. "There is a bit of a feeling of a turning point."

Only a temporary uptick?

The risk is that the improvement in the indicators could be temporary, while the roll call of bleak economic data combined with dire corporate earnings reports appears set to continue in the coming months.

Coinciding with this are likely to be growing tensions in the currency bloc as a result of the dramatic turnaround in the economic performance of several member states such as Spain, Ireland, Italy and Greece.

Euro membership might have helped currency bloc nations to ward off an economic meltdown as the global slowdown has gained momentum. But membership has also meant that countries hit hard by the economic crisis have been unable to lay the foundations for recovery by allowing falling national currencies to boost exports.

The European Commission also warned this week that slowing economic growth and increased government spending could mean budget deficits will balloon across the euro zone this year, which in turn could add to the economic strains threatening the currency bloc.

Next week is critical

A major test of the economic mood in the euro zone is likely to come next Tuesday with the release of Germany's closely watched Ifo business confidence survey, which plummeted in December to a low last seen during the 1980s oil crisis.

A sharp fall in the index's component measuring the current business climate in Europe's biggest economy is expected to result in the Ifo edging down again in January.

But many analysts believe the component, gauging expectations for the world's top exporting nation six months down the track, could rise slightly this month.

"Friday's PMIs were just the beginning of another batch of confidence indicators," said ING's Brzeski. "It is very likely that the stabilization of the situation will be confirmed."

Another key indicator released this week showed German investor confidence jumping more than expected in January on hopes of the economic recovery starting to take shape as the year unfolds.

"The financial analysts share the optimism of recent economic forecasts predicting that economic perspectives should improve from the middle of this year," said Center for European Economic Research chief Wolfgang Franz on releasing the survey. The ZEW index also measures economic sentiment over a six-month timeframe.

Banking sector causes concern

But Franz went on to say: "These expectations have to be seen against the background of the current economic situation which is assessed to have deteriorated further this month."

Indeed, the release of the latest economic sentiment surveys came amid fresh evidence of the continuing turmoil in the global banking sector and the rapid contraction in world economic growth.

In addition, investors are bracing themselves for what is likely to be a gruesome fourth-quarter corporate reporting season with share markets keenly waiting to see how leading European companies see their business year unfolding.

Earlier in the week, the European Commission revised down sharply its 2009 growth outlook for the euro zone saying it expects currency bloc's economy to shrink 1.9 per cent this year before growing by a meager 0.4 percent in 2010.

But while slashing Germany's 2009 growth forecast to a 2.25-percent contraction, German Economic and Technology Minister Michael Glos said: "We will see a change for the better during the second half."