European Confidence Declines, Inflation Accelerates

European Confidence Declines, Inflation Accelerates

Jan. 31 (Bloomberg) -- Confidence among European executives and consumers in the economic outlook slumped more than forecast as inflation accelerated and concern mounted that the U.S. economy may slide into recession.

An index of sentiment in the euro area dropped to 101.7 this month, the lowest since January 2006, from a revised 103.4 in December, the European Commission in Brussels said today. The inflation rate rose to 3.2 percent, the highest since December 1993, a separate report showed.

Slowing economic growth and soaring prices have created a dilemma for the European Central Bank, which aims to keep inflation just below 2 percent. While ECB officials say the U.S. slowdown will affect euro-area growth, accelerating inflation has restrained them from cutting interest rates and put them in what the International Monetary Fund calls a ``difficult'' position.

``The problems in the U.S. will have an impact on the rest of the world, including the euro area,'' said Luigi Speranza, an economist at BNP Paribas in London. ``We've been a bit skeptical about this decoupling idea,'' he said, referring to the theory that the rest of the world could pick up the economic slack as U.S. growth slowed.

Economists had forecast that confidence would fall to 104.1 from an initial December reading of 104.7, according to the median of 27 economists surveyed by Bloomberg News. Inflation was forecast to remain at 3.1 percent, a separate survey showed.

Half the Pace

The euro fell 0.1 percent to $1.4850 as of 10:25 a.m. in Brussels, while bonds rose. The yield on the two-year German note fell 7 basis points to 3.40 percent. It has tumbled 60 basis points this month, the sharpest fall since March 1995.

U.S. economic growth slowed to a 0.6 percent annual rate in the fourth quarter from 4.9 percent in the prior three months, according to figures published yesterday. That was half the pace forecast by economists. Also yesterday, the U.S. Federal Reserve lowered its benchmark interest rate by half a percentage point, its second move in less than two weeks.

While the Fed's Jan. 22 emergency rate cut prompted investors to increase bets that the ECB would lower its benchmark rate later this year, ECB council member Axel Weber said Jan. 24 that such bets may be ``wishful thinking.''

The euro-area economy will be ``affected to some extent'' by slower U.S. expansion, ECB member John Hurley said yesterday. ``We haven't seen the same difficulties in the euro area,'' where economic growth ``is still strong,'' he said.

Price Expectations

An index of manufacturers' selling-price expectations increased to a seven-month high, according to today's confidence report, while consumers' inflation expectations remained at 28, above the long-term average of 23.

The services component of the confidence index fell to 12 points in January from 14 in December. The measures of industrial, construction and consumer confidence also declined, as did consumers' outlook for their financial situation and for the overall economy.

The International Monetary Fund on Jan. 29 cut its forecast for global growth this year to 4.1 percent, the slowest pace since 2003, as tighter access to credit in the U.S. weighs on other assets and economies. The IMF pared its forecast for the U.S., the world's biggest economy, to 1.5 percent from 1.9 percent, and cut its euro-area estimate by half a percentage point to 1.6 percent.

Reports earlier this month showed services growth in the euro area cooled last month, while manufacturing maintained its pace. European retail sales fell for a fourth month in January as rising fuel, utility and food prices left shoppers with less money to spend, the Bloomberg purchasing managers index showed yesterday.

The drop in retail sales came even as euro-area unemployment remained at a record low 7.2 percent in December, according to statistics office data released today.

The inflation figure published today is an estimate by the statistics office, which will publish a final figure on Feb. 29.

BLOOMBERG