Italian Business Confidence in August Holds at Seven-Year Low

By Flavia Krause-Jackson

Sept. 3 (Bloomberg) -- Italian business confidence held at its lowest level since the Sept. 11 terrorist attacks as the risk of recession and slumping consumer demand crimped optimism among manufacturers.

The Isae Institute's business confidence index held at 83.5, matching the lowest reading since October 2001, the Rome- based research center said today. That's less than the median forecast of 84 in a Bloomberg survey of 17 economists.

A 47 percent surge in the price of oil over the past year has raised production costs and pushed inflation in the euro area to the highest rate in 16 years. Italy's economy unexpectedly shrank in the second quarter, edging it closer to the fourth recession in a decade.

``Right now we are seeing stagnation and after the contraction of the economy earlier this year, the outlook has worsened for the second half and at this point, a recession cannot be excluded,'' said Marco Valli, an economist at UniCredit in Milan.

More Italian businesses stayed idle for more days in August, the month many companies shut for the summer holidays, Isae said in a statement. Italian industrial production stagnated in June, according to the latest manufacturing data.

The darkening economic outlook is hurting businesses. Italian new auto registrations declined for an eighth straight month in August, cutting Fiat SpA's car sales by 23 percent in its biggest market. As Italy's biggest manufacturer, Fiat is a bellwether for the state of the country's economy.

European Pessimism

Elsewhere in Europe, the prospects are similarly bleak. German business and consumer confidence declined in August, and in neighboring France optimism among manufacturers plunged in July to its lowest since 2005. British consumer confidence held at the lowest level in at least four years in August, a separate report showed today. Overall, European confidence fell more than economists forecast in August, a report Aug. 29 indicated.

Crude-oil prices reached an all-time high of $147.27 a barrel on July 11, pushing up manufacturers' costs and eroding the purchasing power of consumers. Consumers have also been saddled with higher mortgage costs after the European Central Bank raised its benchmark lending rate at a seven-year high of 4.25 percent.

To counter the effect of higher fuel costs and dwindling spending, the government of Prime Minister Silvio Berlusconi will apply a ``Robin Hood'' tax on the profits of oil companies such as Eni SpA and spend the proceeds on housing aid and food coupons for the most impoverished households.

Italy's economy will expand 0.5 percent this year and the next, the International Monetary Fund predicts. That would be the worst performance among the world's advanced economies, defined as the Group of Seven countries and the 15 euro nations.

Isae conducted its survey of 4,000 companies between Aug. 2 and Aug. 28.

To contact the reporters on this story: Flavia Krause-Jackson in Rome at fjackson@bloomberg.net