Monday, June 30, 2008

EU Confidence Indicator

Confidence among European executives and consumers dropped again in June as inflation accelerated and the European Central Bank signaled it may increase interest rates to a seven-year high.

The index measuring sentiment in the euro area fell to 94.9, the lowest level since May 2005, from 97.6 the previous month. Europe's manufacturing, services and retail industries have all shrunk this month as the euro's increase reduced export competitiveness and soaring food and energy prices undermined purchasing power. Oil reached a record above $143 a barrel today. Even as economic growth eases, ECB President Jean-Claude Trichet has said the bank may raise the benchmark rate on Thursday by a quarter point to 4.25 percent to tame inflation.

The sub index of confidence among manufacturers across the 15 nation eurozone fell to minus 5 in June from minus 2 in May, while consumer sentiment dropped to minus 17 from minus 15, according to today's report. Confidence in the construction and retail industries also declined.

The euro has increased 17 percent against the dollar in the last 12 months. A measure of companies' selling-price expectations rose to 16 in June from 13 in May, which compares with an average reading of 6 over the last 18 years, according to the commission report. Consumers also expect prices to rise more sharply than they did last month.

Separate figures released last Friday showed France's economy expanded less than initially estimated in the first quarter as household spending, the driving force of growth, stagnated.

Recent data show few signs that the situation is going to get any better. The June purchasing managers index for the eurozone fell in June, dropping further below the 50-point level that signals contraction. In the services industry, new business also declined this month.

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