The Euro-Zone December Economic Confidence Indicator (ESI) dropped to 67.1 from 74.9 in the previous month. Our forecast was 73.5 and our median 73.0 so data were much weaker than expected. The breakdown showed industrial confidence falling to -33 from -25 in November, a reflection of sharply slowing domestic demand, but also the slump in exports as the financial crisis reaches Asia and Eastern Europe. Consumer confidence dipped to -30 from -25 on pessimism about the general economic outlook and the unemployment situation. The dip in energy prices that month helped to bring inflation expectations down, but did little to boost spending with the reading for future major purchases unchanged at -22. Services confidence dipped to -17 from -12 and retail confidence slumped to -19 from -13. Construction confidence also continues to decline, with the overall reading now down at -27, after -24 in the previous month. The sharp drop in confidence across the board will add to pressures on the ECB to cut rates again next week, but we suspect the pace of cuts will slow down as real rates approach 0.

Meanwhile, Euro-Zone November unemployment rose to 7.8% from 7.7% in October. The upturn was in line with expectations. Countries mostly affected are those with a previously booming housing market, such as Spain, which saw the jobless rate rising to 13.4% in November, from 12.8% in October. December data showed that even the German labour market, which still remained steady in November, is now feeling the chill from the fallout of the financial crisis and Euro-Zone unemployment is set to rise sharply this year and act as a drag on consumption and domestic demand.

In addition, Euro-Zone Q3 GDP was confirmed at -0.2% q/q and 0.6% y/y, in line with the preliminary number and compared to -0.2% q/q and 1.4% y/y in Q2. The breakdown confirmed household spending at 0.0% q/q, while government spending was revised slightly down to 0.7% q/q from 0.8% q/q. Gross fixed investment growth was confirmed at -0.6% q/q while export and import growth were revised down to 0.0% q/q and 1.4% q/q respectively, from 0.4% q/q and 1.7% q/q reported previously. Ne exports detracted 0.6% points from the quarterly growth rate and investment a further 0.1% point. Household consumption was neutral for growth and government consumption added a modest 0.1% point. Without a 0.4% point contribution from investory changes the quarterly growth rate would have looked even more dismal. Data confirmed that the Euro-Zone is in technical recession and more up to date numbers point to another negative GDP figure in Q4 as export demand is breaking off.