Global Economic Confidence Drops on Market Turmoil, Oil Surge

By Simon Kennedy

July 17 (Bloomberg) -- Confidence in the global economy deteriorated this month from Asia to the U.S. as the oil price rose to a record and the financial crisis deepened, a survey of Bloomberg users on six continents showed.

The Bloomberg Professional Global Confidence Index fell to 10.3 from 21 in June as sentiment toward the U.S., German, Japanese, French and U.K. economies weakened. That was the lowest reading since the survey began in November. Participants in Asia replaced those in Western Europe as the least optimistic.

``We're starting to approach that tipping point when the oil price is really going to impact economies,'' said Nick Kounis, an economist at Fortis Bank NV in Amsterdam who participated in the survey. ``We're much more pessimistic about the global economy.''

The oil price has almost doubled over the past year, reaching a record above $147 a barrel last week. That's hurting consumers and companies and fanning inflation enough to force central banks to raise interest rates. With the U.S. housing recession eroding confidence in financial institutions such as Fannie Mae and Freddie Mac, global stocks have tumbled into a bear market.

The survey was conducted between July 7 and July 11 and collated the responses of 5,450 Bloomberg users from Tokyo to New York. The index of Asian confidence in the world economy fell to 7 from 19.4. Respondents in Japan reported that the world's second- largest economy was in worse shape than a month ago and predicted the country's stocks to fall during the rest of this year.

U.S. participants predicted that the dollar will continue its slide below $1.60 per euro. Respondents in Spain were the most pessimistic about their own economy, while participants in Brazil were alone in expressing optimism.

The survey also included questions about bonds, currencies, stocks and interest rates over the next six months.

Global Economy

The U.S. housing slump last year sparked a credit market rout that's still rippling through the global economy. Higher borrowing costs are causing housing-led expansions to crumble in the U.S. and Europe, and banks have recorded more than $415 billion in losses and writedowns.

The market crisis worsened over the past week amid concern Fannie Mae and Freddie Mac don't have enough capital to survive the housing downturn. That forced Treasury Secretary Henry Paulson on July 13 to seek authority to buy unlimited stakes in the companies and lend to them.

The MSCI World Index of stocks has dropped more than 20 percent since its October record and yesterday fell to a two-year low.

Policy makers are also combating inflation just as global growth slows. Federal Reserve Chairman Ben S. Bernanke said July 15 that inflation risks have ``intensified.''

Challenging Year

``The world economy is facing a challenging second half of the year,'' said Kenneth Broux, an economist at Lloyds TSB Group Plc in London who participated in the survey. ``The big question is whether the U.S. economy slows from here on the back of higher oil prices and the crisis at the mortgage lenders.''

Investors, analysts and traders in the U.S. were less optimistic about growth than in June. A measure of confidence in the economy fell to 8.8, the lowest since March, from 16.1. An index of dollar sentiment dropped to 45.4 after two months above 50. The measure for equities fell to 28.4 from 35.4.

The dollar has lost 14 percent of its value against the euro in the past year, declining to a record $1.6038 on July 15.

U.S. respondents trimmed expectations that the Fed will raise interest rates by the end of the year, with the relevant index slipping to 57.4 from 60.4. Bernanke this week signaled policy makers are unclear about the direction of rates because the risks to both growth and inflation have increased.

ECB Split

Those surveyed in Europe were the most worried about the outlook for their economy since the survey began and the regional index dropped to 15.5 from 22.3. The 15-nation euro area may have contracted last quarter for the first time since the single currency began trading in 1999 and investor confidence in Germany fell to a record low in July.

Respondents split over the direction of the euro. Those in Germany and France predicted it will continue to rise and participants in Italy and Spain say it will decline.

Bloomberg users in Spain, where a decade-long housing boom has collapsed, were the most downbeat about their own country. Most European respondents say the European Central Bank, which raised its key rate to a seven-year high of 4.25 percent this month, won't cut interest rates.

In the U.K., faith in growth and stocks waned and respondents reversed their forecast for rate cuts. Participants in South America were more confident in their region than in the global economy and the index for the continent was at 29.8.

To contact the reporter on this story: Simon Kennedy in Paris at skennedy4@bloomberg.net