Euro zone economic sentiment eased only marginally in October, data showed on Thursday, raising some hopes the bloc's economy may escape a contraction in the fourth quarter.
The European Commission's monthly sentiment survey showed the sentiment index at 94.8 against 95.0 in September. Economists polled by Reuters had expected a reading of 93.7.
The Economic Sentiment Indicator gives grounds, at first glance at least, for hope that the euro zone economy will narrowly escape a recession, said Christoph Weil, economist at Commerzbank.
This does not mean the all-clear yet though. Business confidence in industry, which largely steers the economic cycle, has continued to slump, he said.
We still believe the indicator will drop further in the next few months and the euro zone economy will shrink in the winter half-year.
The Commission's survey showed a more downbeat mood in industry and among consumers was largely offset by more optimism in services.
Sentiment in industry fell to -6.6 from -5.9 in September and among consumers to -19.9 from -19.1. The mood was unchanged in the retail sector, with the index at -9.8 and it improved in the services sector to 0.2 from 0.0.
Activity slowed down significantly in the third quarter and it is likely to remain weak, or even falling slightly, in the fourth quarter, said Clemente de Lucia, economist at BNP Paribas.
Nevertheless, recent actions taken by governments could break the negative vicious circle that is affecting the real economy, restoring confidence, which is the key ingredient for recovery and growth, de Lucia said.
Euro zone leaders agreed on a comprehensive response to the confidence-sapping sovereign debt crisis on Thursday, outlining steps to boost the firepower of their bailout fund, a second financing package for Greece and bank recapitalisation.
The euro rose against the dollar on the deal and stock markets rose.
The Commission survey also showed that inflation expectations eased among consumers to 24 points from 25.3 and companies' inflation expectations fell to 5.0 from 6.9.
Economists said that strengthened the case for a rate cut by the European Central Bank in early November to prop up the sagging economy.
The very serious possibility of euro zone GDP contraction in the fourth quarter, coupled with signs in the European Commission's survey that underlying inflationary pressures are easing, provides a compelling case for the ECB to cut interest rates next Thursday at its November policy meeting, said Howard Archer, economist at IHS Global Insight.
Indeed, we believe that there is a very decent case for the ECB to cut interest rates by 50 basis points from 1.50 percent to 1.00 percent next Thursday, but we are far from confident that they will even enact a 25 basis point cut to 1.25 percent, Archer said.
(Reporting by Jan Strupczewski, editing by Juliane von Reppert-Bismarck and Rex Merrifield)