Euro recession fears grow as business morale dips

25 Sep, 2008

Business confidence dropped in Germany, France and Italy in September, surveys showed on Wednesday, adding to fears the eurozone is sinking into recession as the effects of US financial turmoil spread. The Munich-based Ifo institute's closely-watched indicator of German business confidence fell for a fourth month running to hit its lowest level since May 2005, when economic woes forced former Chancellor Gerhard Schroeder to call early elections.
Other surveys showed Italian corporate sentiment mired at record lows last seen after the September 11 attacks on the United States in 2001. French business morale plunged to its worst level in over five years. Germany, France and Italy have the biggest economies in the 15-nation eurozone, together making up about two-thirds of its total gross domestic product (GDP).
Royal Bank of Scotland analysts followed the data with a research note titled "Full blown recession looming in 2009 in the euro area". The bank slashed its 2009 German GDP forecast to -0.1 percent from 0.6 percent growth previously and predicted the European Central Bank, which remains focused on inflation risks, would be forced to shift its view soon.
"The European Central Bank's realisation that the euro area is headed for a recession will result in deeper (interest rate) cuts next year," RBS economist Jacques Cailloux wrote. However, ECB Governing Council member Marko Kranjec said the bank did not yet believe Europe was in the grip of recession. "We see signs of a slowdown but we (the ECB) don't speak yet of recession," he told reporters.
The Italian data was collected in the first half of the month, but a substantial portion of the German and French responses came after troubles at US investment bank Lehman Brothers and insurer AIG sent stock markets reeling last week. The crisis has prompted the US government to propose a $700 billion rescue package for the country's financial sector, but Germany and other European countries have seen no need to replicate the US plan for their own institutions.
Tighter credit in the wake of the crisis looks sure to constrain household consumption and corporate investment, though, even if Europe does not suffer the same financial upheaval under way in the United States. Eurozone government bonds edged higher after the Ifo data but the euro recovered after an initial fall against the dollar as traders awaited news on the fate of the US plan, aimed to mop up toxic mortgage debt and soothe global market jitters.
Germany's DAX index of leading companies has fallen over 5 percent in September alone, while the DJ Stoxx index of European shares is down over 7 percent this month. The Ifo said its business climate index, based on a monthly poll of around 7,000 firms, fell to 92.9 from 94.8 in August.
More worrying for the outlook was a sharp drop in the component of the index which measures corporate expectations for the next half year. That measure dipped to 86.5, its worst reading since February 1993. The poor data from Germany, France and Italy came a day after the Markit/CDAF purchasing managers index (PMI) suffered its sharpest contraction in over six and a half years.

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