Eurozone Confidence Takes Hit, Worse To Come

The euro zone's growth outlook showed further signs of weakening this week, putting an interest rate rise firmly on the back burner.

Business confidence measures from Germany, Italy, the Netherlands and Belgium dropped in September, with France the only country to buck the trend, reporting a stabilization in sentiment. But economists felt sure the worst is yet to come as the implications of tightening credit conditions for the world economy take time to sink in. "In our view it would be a mistake to see this softening as temporary," said Ken Wattret, an economist at BNP Paribas. "Once these surveys turn, they tend to trend in one direction for some time." The headline measure of Italian business confidence declined more than expected to 92.2 from a downwardly revised 93.8 in August, data released Wednesday showed. The deterioration, which economists said was mainly due to lower domestic orders, pushed the index to a 21-month low. In the Netherlands, business confidence dropped to 7.5 in September from 7.8 in August, according to the Dutch Central Bureau of Statistics, and the Insee measure of French business confidence leveled off at 110 in September, ahead of economists expectations of a decline to 108. The decline in the Italian and Dutch business confidence measures follows hot on the heels of a sharp dip in Germany's closely watched Ifo index, which fell for a fourth straight month in September to hit a 19-month low. Munich-based Economic Research institute, Ifo, Tuesday said its Business Climate Index had dropped to 104.2 from 105.8 in August, sharper than the 105.0 predicted by economists. That came on the back of a sharp decline in the Belgian business confidence, often described as the bell-weather of European sentiment, which came in at 1.5, far below expectations and well beneath the 7.8 level recorded in August.

Eurozone's Economic Growth Threatened

Combined, these indices added to fears that the recent credit crunch and the unprecedented strength of the euro are impeding the euro zone's economic growth. With concerns over the outlook for the economy growing, the ECB appears increasingly unlikely to add to the eight rate hikes it has announced since December 2005. "These indicators have clearly and collectively been influenced by recent turmoil in financial markets and the downward trend in confidence is consistent with our view that the ECB is unlikely to hike rates again," said Sunil Kapadia, an economist at UBS Investment Research. Despite recent data suggesting that the credit crunch is having a negative effect on the real economy, the ECB has yet to abandon its tightening bias, signaling its intention to raise its main policy rate to 4.25% from 4.00%. In September it postponed such a move, entering a "wait and see" mode as it assessed what impact the market turmoil would have on the euro zone's economy. But Wednesday's data will add to the view that another hike is off the cards, especially if other indicators fall. And those figures don't bode well for the euro zone-wide barometer of economic sentiment, due Friday, either. In August, that measure fell for the third straight month, to 110.0, coming in below economists expectations. Since then, economists said conditions in the money and credit markets have worsened and, combined with the rising euro exchange rate and tighter monetary policy, this will likely send the measure lower.