Gloom in European business

Gloom in European business

LONDON

Friday, July 25, 2008

EUROPE'S economy is taking a bigger hit than expected as the global credit crunch and rising costs erode corporate and consumer confidence, data showed yesterday.

Surveys of German, French and Italian businesses all came in below consensus expectations, British retail sales took a record fall and optimism among euro zone service providers hit its lowest point in at least 10 years.

German business sentiment suffered its biggest drop since the Sept 11, 2001 attacks on the World Trade Centre, according to the closely-watched Ifo index.

"It's a horrible number," Michael Klawitter, a currency strategist at Dresdner Kleinwort in Frankfurt, said of the main Ifo index at 97.5. It sent the euro down more than half a cent to a two-week low.

The RBS/Markit survey of around 5,000 companies across Europe showed euro zone services and manufacturing activity shrank at a faster pace than expected in July.

Official data showed French business confidence fell more sharply than expected in July to its lowest level in three years and Italian business morale fell to a near seven-year low.

"It's not good at all. I think there's a real risk of finding ourselves in a technical recession in France and the euro zone," said Olivier Gasnier at Societe Generale in Paris. A recession is usually defined as two successive quarters of economic contraction.

Evidence of weakness was widespread outside the euro zone too.

Denmark, which became the first European Union country to enter technical recession earlier this year, said its consumer confidence reading had fallen to a 16-year low.

Sweden added to signs of Nordic region's souring economic conditions when it said earlier yesterday unemployment had surged more than expected while wholesale inflation had picked up slightly.

And across the water retail sales in Britain slumped in June at the fastest rate since the series began in 1986.

"We think that a sharp consumer downturn is on the cards that will leave the economy flirting with recession over the coming quarters," said Nick Kounis at Fortis Bank.

The euro zone reports will make uncomfortable reading for the European Central Bank, which raised interest rates to 4.25 per cent this month to battle inflation at a record high of 4.0 per cent, way above its 2.0 per cent target ceiling.

"With growth slowing abruptly and inflation expectations off the peak, risks of a near-term ECB hike have diminished substantially," said Marco Valli and economist at UniCredit MIB.

The outlook in the 15-nation bloc is bleak as companies are pessimistic about their future with business expectations in the dominant service sector at 50.2, its lowest since the RBS/Markit survey began in 1998.

At the same time, inflation remains high. For months, commodity, fuel and food prices continued to breach new highs and have only recently begun to fall away.

Economies around the world have been undermined by a credit crisis that started with mortgage problems in the United States and falling house prices and led to blockage in money markets and several prominent bank failures.

Spain's economy is taking a particularly dramatic dive after the end of long-running housing boom, and yesterday's data included Spanish jobless numbers showing unemployment jumped to a higher-than-expected 10.4 per cent in the second quarter, its highest in three years.Reuters