Data show euro zone morale sinking


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 today.

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 September 11th, 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 which at 97.5 significantly undershot the Reuters consensus forecast of 100 and 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 today 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. A recent Reuters poll found the prospects for a recession in the UK had increased.

"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 per cent, way above its 2 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.