Business, consumer optimism slips in Europe

[August 30, 2011]  FRANKFURT, Germany (AP) -- Business and consumer optimism in the 17 countries that use the euro fell in August, reinforcing fears that the region's economy will slow in the months ahead as political leaders struggle to contain a crisis over government debt.

The European Union's economic sentiment index issued Tuesday fell 4.7 points to 98.3 -- the sixth consecutive decline, bringing the indicator below its long-term average of 100.

Germany, the eurozone's biggest economy, reported the largest drop, and it alone remains above the 1990-2011 average. The Netherlands was also saw a significant fall while Italy's slid somewhat less.

The reasons for the decline included gloomier views of the future among retailers, and among consumers afraid of losing their jobs, EU economic officials said in a statement accompanying the index numbers.

Additionally, industrial managers are concerned about weaker future export orders and inventories that may be overstocked for upcoming demand.

Economists and government officials say the economy is starting to be affected by financial market ups and downs caused by fears that some governments may not be able to repay their debts. Stock and bond markets fell sharply in early August amid fears that efforts by eurozone government leaders were not enough to contain the crisis.

European Monetary Affairs Commissioner Olli Rehn told EU lawmakers on Monday that the market volatility was now affecting the real economy.

The European Central Bank has fought the market turmoil for three weeks by buying Italian and Spanish government bonds to reduce financial pressure on those countries, but governments are still struggling to reduce debt and find a more permanent solution. Leaders agreed July 21 to give new powers to the eurozone's euro440 billion ($637 billion) bailout fund, enabling it to take over the bond purchases from the ECB and loan money quickly to troubled governments, but national parliaments have not yet ratified those changes.

"It is evident that both businesses and consumers are very worried by the slowdown in domestic economic activity, heightened financial market turmoil, ongoing serious concerns over the Eurozone sovereign debt situation and increased fears over the health of the global economy," Howard Archer, an economist at IHS Global Insight, wrote in a note.

The EU forecasts 1.6 percent growth this year for the eurozone, but those predictions are due to be lowered on Sept. 15. The European Central Bank has indicated it is reassessing its inflation outlook, in an indication that its key interest rates may be on prolonged hold at 1.5 percent after quarter point increases in April and July.

The sentiment index fell further, to 97.3, for the entire 27-member European Union including countries that do not use the euro. Britain showed a sharp drop of 5.6 points because sentiment was down sharply in the services sector.

The economic index combines indicators for business and consumers: 40 percent industrial confidence, 30 percent services, 20 percent consumers, 5 percent construction and 5 percent retail.

[Associated Press; By DAVID McHUGH]

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