European economic confidence falls as inflation gains ground 01/03/2008 00:00

European business and consumer confidence slumped again in February, a key survey released Friday showed, amid signs of renewed inflation pressures and stoking worries about global stagflation.

1 March 2008

BERLIN - European business and consumer confidence slumped again in February, a key survey released Friday showed, amid signs of renewed inflation pressures and stoking worries about global stagflation.

The European Commission said its closely watched economic sentiment indicator for the 15-member eurozone dropped more than forecast by 1.6 points to 100.1 in February to its lowest point in more than two years.

Economists had expected the index - which has steadily declined since the middle of 2007 - to slide in February to 101.2 from 101.7 in January.

"The continuing fall in the economic sentiment indicator points to significantly weaker growth in the first half of 2008," said Christoph Weil, economist with Commerzbank AG.

The release of the survey coincided with new data pointing to a pickup in inflation across the currency bloc and comes ahead of next week's meeting of the European Central Bank's 21-head rate-setting council.

Figures released by the European Union statistics office Friday confirmed January annual consumer prices in the eurozone again overshooting the ECB's two-per-cent target to come in at 3.2% - its highest level since the launch of the euro.

Economists expect preliminary data to be released Monday to show eurozone inflation remaining stuck at 3.2% in February with oil prices having this week surged to hit a record of 102 dollars a barrel.

In the meantime, analysts have begun reviewing their interest-rate projections for the currency bloc.

On Friday, Germany's statistics office said January retail sales rebounded by 1.6% month on month and by 0.6% on the year, adding to hopes that Europe's biggest economy will withstand an expected world economic slowdown.

Economists had forecast a monthly rise of 1.0% for January and a fall of 2.1% year on year.

Indeed, signs that the German economy should escape the worst of the fallout from any contraction in the global economy could mean that the ECB will be able to avoid cutting borrowing costs in the coming months.

While the ECB is expected to hold its benchmark rate at 4.0% next Thursday, analysts will be focused on ECB chief Jean-Claude Trichet's press conference following the governing council meeting for hints as to how the bank sees the eurozone's monetary policy unfolding in the months ahead.

This is especially the case as the ECB is set to release next Thursday its latest so-called staff growth and inflation projections which are expected to include an upwardly revised figure for the consumer price outlook.

Germany's statistics office said Friday that inflation in Europe's biggest economy came in at 2.8% in February, the same as in January.

Up until now, analysts had expected that signs of slowing growth across the currency bloc would force the ECB to follow the world's other leading central banks and trim rates.

The recent surge in the euro is also likely to help the Frankfurt- based ECB to buy time on rates with the common currency's climb resulting in tighter monetary conditions in the eurozone.

The euro hit an all-time high of 1.5239 dollars Friday as concerns about the outlook for the US economy and expectations of further US rate cuts again undercut the greenback, which is ending the week down against major currencies.

Seasonally-adjusted eurozone unemployment stood at 7.1%in January 2008, separate data released Friday showed, unchanged compared with December 2007. The jobless rate was 7.7% in January 2007.

Unemployment in the broader 27-member European Union came in at 6.8% in January, while annual inflation stood at 3.4%, Friday's figures showed.