Latest surveys indicate near stagnation in euro zone

EURO ZONE consumer optimism has plummeted this month at the fastest rate for 20 years, while manufacturing contracted for the first time in two years, according to surveys that indicated economic growth across the region would remain at near stagnation.

The European Commission said its consumer confidence indicator fell 5.4 points to -16.6 in August – a larger monthly fall than was seen in October 2008 after the collapse of Lehman Brothers.

The sharp deterioration to the lowest level since June last year suggested the euro zone debt crisis and worries about global prospects have darkened the economic mood even more than economists had feared.

Separately, purchasing managers’ indices showed private sector activity barely rose in August as German prospects weakened again, adding to the difficulties facing the region’s leaders as they try to restore confidence in the monetary union.

“Most worrying is the near stagnation in Germany, which suggests that the region’s main engine of growth has stalled,” said Chris Williamson, chief economist at Markit, which produces the indices.

German service sector expectations about prospects registered the biggest monthly drop since the survey began in mid-1997, Markit said.

German investor confidence has also fallen sharply this month, the Mannheim-based ZEW economic institute reported. Its “economic sentiment” index plunged 22.5 points to -37.6 in August – the lowest since December 2008.

However, the euro zone still seems some way from sliding back into recession. The purchasing managers’ indices showed a slight but unexpected reacceleration in French private sector activity in August. Overall, the indices have yet to see falls as steep as those that followed the collapse of Lehman Brothers in 2008.

“I think we will avoid a double dip,” said Marco Valli, an economist at Unicredit in Milan. “A lot depends on financial markets, but if we don’t see a further escalation of tensions, and given our view that global trade will not fall off a cliff, I think we’re in a good position to avoid negative growth.”

Germany’s Ifo business survey, released today, will show how much the mood has deteriorated in its industrial sector.

Led by Germany, the euro zone economy grew strongly at the start of this year, but has since slowed markedly, hit by fiscal austerity measures across the continent and weaker global growth.

Data last week showed German gross domestic product expanded just 0.1 per cent in the second quarter compared with the first. Euro zone GDP increased 0.2 per cent over the same period.

The latest purchasing managers’ indices suggested growth in the third quarter could prove even weaker.

This week the Bundesbank forecast Germany’s economy would continue to grow in the second half of 2011, although “somewhat more slowly”. – (Copyright The Financial Times Limited 2011)