European Confidence Drops by Record as Crisis Deepens

By Fergal O'Brien

Oct. 30 (Bloomberg) -- European confidence in the economic outlook fell by a record after the worsening credit crisis sent stocks plunging, shut off companies' access to funding and heightened concerns that a recession looms.

An index of executive and consumer sentiment dropped 7.1 points to 80.4, the European Commission in Brussels said today. That is more than the 1.7-point drop economists had forecast and is the biggest slide since the data were first compiled in 1985. The decline takes the gauge to the lowest in 15 years.

Europe's automobile manufacturers, chipmakers and airlines are feeling the pressure as the financial crisis that prompted interest-rate cuts and government bailouts of banks spreads to the wider economy. Deutsche Lufthansa AG, the region's second- biggest airline, yesterday said it will trim expansion plans as slowing economic growth hurts passenger and cargo traffic.

``The euro zone is clearly in a recession, upping the pressure on the European Central Bank to cut interest rates further,'' said Christoph Weil, an economist at Commerzbank in Frankfurt. ``There are no signs of an early improvement.''

The ECB and the U.S. Federal Reserve last month cut interest rates by half a percentage point as part of a global coordinated move involving six central banks. The Fed yesterday cut rates again by a further half-point.

Slowing Inflation

Slowing inflation makes it easier for the ECB to potentially follow the Fed in cutting rates further. A gauge of company selling-price expectations fell for a third month in October, according to today's report. The euro-area inflation rate probably fell to a nine-month low of 3.2 percent this month, a survey of economists showed. That data is scheduled to be published tomorrow.

Policy makers have provided banks with unlimited access to dollar funding, while governments in nations including France, Germany and Spain in the past month committed 1.3 trillion euros ($1.7 million) to guarantee bank loans and take stakes in lenders after credit markets froze up following the collapse of Lehman Brothers Holdings Inc. The European Union yesterday pledged to present an economic-recovery plan next month and to double the limit on loans to distressed EU nations.

The cost of borrowing money among banks has fallen after the actions. The euro interbank offered rate, or Euribor, that banks charge each other for three-month loans fell more than 3 basis points to 4.79 percent today, the lowest since April 18.

Global Stocks

Global stocks rose today, pushing the MSCI World Index up 2.4 percent, after the Fed cut rates again and provided $120 billion to South Korea, Singapore, Brazil and Mexico. The MSCI index is still down 41 percent this year, while in Europe the Dow Jones Stoxx 600 is also down more than 40 percent.

The euro rose 0.9 percent to $1.3075 against the dollar, having fallen to $1.2330 on Oct. 28, the lowest in more than two years.

A measure of manufacturers' confidence dropped to minus 18 this month, the lowest in seven years, from minus 12 in September, according to the commission report. Confidence among consumers plunged to the lowest since 1994, while sentiment in the services, retail and construction industries also declined.

Separately, European retail sales fell for a fifth month in October, marking the most protracted slide since at least 2004, the Bloomberg purchasing managers index showed today.

``One thing the recent initiatives cannot address is the extremely poor near-term economic outlook,'' said Simon Barry, an economist at Ulster Bank Ltd. in Dublin. ``It will be the second half of 2009 at the earliest before any meaningful signs of a turnaround can be expected to show through.''

Consumers' Willingness

Metro AG, Germany's largest retailer, today said sales growth slowed in the third quarter as a weaker domestic economy curbed consumers' willingness to spend. Software maker SAP AG this week withdrew its full-year sales outlook and Lufthansa lowered its 2008 earnings forecast.

``In the course of the third quarter, the financial crisis took on new dimensions that have seriously impaired the prospects for the world economy and for passenger air traffic,'' Lufthansa said on Oct. 29. ``In the long term, demand is expected to continue to develop positively, but in the short term, uncertainty about economic effects has risen considerably.''

Some companies are coping better than others. Unilever, the world's second-largest consumer-products company, today said annual sales growth will exceed its target range. Volkswagen AG said third-quarter profit rose 27 percent as sales in China, India and Russia offset weakening markets in the U.S. and western Europe.

Economic Fallout

To tackle the economic fallout from the credit crunch, Italy's government plans tax breaks for manufacturers, France has delayed a proposed levy on business investment, while German Chancellor Angela Merkel is also considering steps to jumpstart Europe's largest economy. President George W. Bush will host a summit of world leaders in Washington on Nov. 15 as they seek to coordinate their reactions to the crisis.

``We are now facing not only a financial crisis but a serious slowdown in our economies that is hitting household, businesses and jobs,'' EU Monetary Affairs Commissioner Joaquin Almunia said in Brussels yesterday. ``We should ensure that the slowdown is as short as possible.''

To contact the reporter on this story: Fergal O'Brien in Dublin at fobrien@bloomberg.net.