Eurozone economy shows early signs of improvement, still in contraction mode

The eurozone economy is starting to show some tentative signs of improvement but is still deep in recession territory, the European Commission said in its quarterly report on the Euro area yesterday.

The financing conditions in the euro area have also improved due to substantial banking support measures implemented by the 16 European Union (EU) states, which helped to avert financial meltdown. Most financial markets are showing encouraging signs of stabilisation although conditions remain fragile, according to the commission's report.

Improved economic sentiment have brought about narrowing on the spreads on money and bond markets and cost of bank loans, equity capital and market debt have all declined.

However, money and credit growth have slowed further in recent months, mainly reflecting very weak economic activity but also some supply constraints, said the report.

The eurozone GDP dropped by 2.5 per cent in the first quarter of 2009, according to Eurostat, which was mainly driven by an inventory adjustment and a continued sharp fall in investment.

The report said that on the positive side, the fall in private consumption was ''contained '' by the ''deceleration of consumer price inflation'' and comparatively supportive developments in nominal disposable income.