European Economic Confidence Falls Most Since December 2008 on Contagion

European confidence in the economic outlook plunged the most since December 2008 this month as a persistent debt crisis roiled markets and clouded growth prospects across the 17-nation euro region.

An index of executive and consumer sentiment in the single- currency region fell to 98.3 from a revised 103 in July, the European Commission in Brussels said today. That’s the lowest since May 2010. Economists had forecast a decline to 100.2, according to the median of 29 estimates in a Bloomberg News survey. In the U.S., consumer sentiment dropped to the lowest level in more than two years, a separate report showed.

The euro area’s economic prospects are deteriorating as national governments cut spending in a bid to narrow deficits and tackle the debt crisis. Economic and Monetary Affairs Commissioner Olli Rehn signaled yesterday that the EU may reduce its 2011 growth forecast from 1.6 percent on concerns that financial turbulence could spill into the broader economy.

“The risk of recession in the euro area has clearly increased as demand from Asia is flagging and governments’ efforts to cut fiscal deficits are curbing domestic consumption,” said Daniel Hartmann, an economist at Zug, Switzerland-based Bantleon Bank AG and the most accurate European forecaster in a Bloomberg News ranking. “I expect the indicator to decline further in the coming months.”

U.S. Confidence Falls

The euro extended its decline against the dollar after the data were released. It traded at $1.4432 as of 5:21 p.m. in London, down 0.5 percent on the day.

A measure of confidence among U.S. consumers plunged to 44.5 in August from a revised 59.2 reading in July, according to the Conference Board in New York. It was the biggest point drop since October 2008.

In Europe, a gauge of sentiment among manufacturers dropped to minus 2.9 from 0.9 in the previous month, today’s report showed. An indicator of services confidence fell to 3.7 from 7.9, while a measure of consumer confidence declined to minus 16.5 from minus 11.2.

European leaders have struggled to contain a debt crisis that originated in Greece and has forced Ireland and Portugal to seek bailouts as well. The European Central Bank began buying Spanish and Italian government bonds on Aug. 8 to stop the debt crisis from spreading to the euro-region’s third- and fourth- biggest economies. The purchases brought the countries’ 10-year bond yields down to about 5 percent from euro-era records, even as Europe’s leaders disagreed over how to contain the turmoil.

‘Modest Pace’

ECB President Jean-Claude Trichet said yesterday that the Frankfurt-based central bank is reviewing its assessment of inflation risks on slower growth in the euro area. The region’s growth slowed to 0.2 percent in the second quarter, its worst showing since emerging from recession in 2009.

Cooling growth may prompt the ECB to refrain from increasing borrowing costs further after it raised its benchmark rate twice this year. The bank will hold its next rate meeting on Sept. 8.

“Looking ahead, we continue to see the euro-area economy growing at a modest pace in a context of overall relatively sound economic fundamentals for the euro area as a whole,” Trichet said. “At the same time, not least because of the recently re-emerged tensions in financial markets, uncertainty remains particularly high.”

Order Books

Although confidence in industry remained above the long- term average, it declined in August “on the back of a drop in managers’ appraisal of the level of order books and production expectations,” according to today’s EU report. These indicators slumped to minus 9.1 from minus 4.7 and to 5.6 from 9.8, respectively.

Manufacturing executives were also more pessimistic about their export order books, with the confidence gauge dipping to minus 9.4 from minus 4.4, the commission said.

ThyssenKrupp AG, Germany’s biggest steelmaker, on Aug. 12 posted fiscal third-quarter earnings that missed analyst estimates. Steelmakers are battling rising raw-material costs even as consumption of the alloy deteriorates. ThyssenKrupp said global demand slowed after a “strong” prior quarter, and European consumption dropped “sharply.”

To contact the reporter on this story: Klaus Wille in Zurich at kwille@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net

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