Europe's economic outlook darkens as business, consumer confidence plunges

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BRUSSELS, Sept 29 (AFP): Europe's economic outlook darkened yesterday as business and consumer confidence plunged in the face of a surging euro, record oil prices and volatile financial markets.
Amid mounting pessimism, top officials from the 13-nation Eurozone voiced growing concerns about the strength of the euro, which hit a new high against the dollar.
Adding to the pall, inflation rose above the European Central Bank (ECB)'s preferred level for the first time in a year, increasing pressure to raise interest rates just as the economy starts to weaken.
"The latest data on the Eurozone economy will no doubt add to concerns over an unfavourable combination of slowing activity and rising price pressures in the region," said analyst Jonathan Loynes at consultants Capital Economics.
Confidence in the European economy dropped more sharply than expected in September, falling to the lowest level in nearly a year a half due to weakness in Germany.
The European Commission's Eurozone economic sentiment indicator retreated in September to 107.1 points in the single currency bloc from 109.9 in August against economists' expectations for 109.1.
Germany, which has led a gradual recovery in Europe, showed particular weakness as confidence in Europe's biggest economy dropped sharply in September.
In another sign of trouble in the economic heavyweight, German retailers reported a 1.4-per cent drop in retail sales in August from July as consumers were hit with rising food and energy prices.
France, the second-biggest Eurozone economy, was also giving off signs of weakness as a key indicator of consumer confidence fell sharply in September.
While energy prices are cutting into consumers' spare cash, businesses are facing tighter credit conditions due to financial market volatility and are at the same time getting pinched by the record strength of the euro.
The European single currency has steadily risen from record to record against the dollar recently, which drives up the prices of imports and makes exports less attractive on international markets.
The euro smashed through the 1.42-dollar level for the first time Friday to hit a new peak of 1.4243 in late trade in London.
"The strong euro, as long as it stays on its path, tends to worry us a lot," said Luxembourg Finance Minister Jean-Claude Juncker, who chairs regular meetings with his Eurozone counterparts. "We are following developments closely."
Striking a more pessimistic tone than in the past, EU Economic and Monetary Affairs Commissioner Joaquin Almunia acknowledged to French daily Le Figaro: "It is true that the loss of the value of the dollar worries us."
Meanwhile, oil prices, which have also hit record peaks recently, and soaring food costs are putting upward pressure on inflation, which surged in September to 2.1 per cent, overshooting the ECB's preferred level of less than two percent for the first time in year.
Economists said that the data put the ECB, ever eager to keep a lid on inflation, in a dilemma because the economy was weakening just as price growth was picking up.
"ECB rate policy is stuck between a rock and a hard place," said Bear Sterns economist David Brown. "Higher inflation and faster monetary expansion continue to provide a rationale for tougher policy ahead.
"But the collapse in Eurozone economic confidence, credit crunch risks and the ever stronger euro are also pointing the way to lower rates over the future," he added.
The ECB called off a rate hike earlier this month in the face of financial market turmoil and since then economists are divided over what its next move will be.