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Eurozone March economic sentiment hits 6-year low

BRUSSELS: Eurozone economic sentiment fell to a six-year low in March, according to data on Monday which showed business and household morale was badly dented even before war broke out in Iraq.

The European Commission's business and consumer survey, based on data that was mostly collected by national member states before the start of US-led attacks on Iraq, showed sentiment fell to 97.8 in March from February's revised 98.4.

It was the indicator's biggest drop since September 11 air attacks on the United States hit morale, and came as consumer confidence fell more than expected to plumb a nine-year low of minus 21 from minus 19 in February. Business confidence hit minus 12, its lowest since September 2002, from minus 11.

A separate report showed euro zone inflation held steady at 2.4 percent in March, surpassing the European Central Bank's self-set two percent ceiling for the eighth month running.

The reports highlight the tough choice facing the ECB, whose primary goal is to maintain price stability, but which is also facing pressure to revive confidence and bolster growth. "Such a drop in confidence has not been observed since the events of 11th September 2001," the Commission said.

"A further deterioration in the expected developments of the general economic situation and the financial situation of households coupled with an anticipated rise in unemployment are behind the worsening of consumer confidence."

Economists polled by Reuters had on average expected the overall economic sentiment to come in at 97.8 and readings of minus 20.4 and minus 12.4 for consumer and business sentiment respectively. February's reading for the economic sentiment indicator had previously been reported as 98.2.

RECESSION FEARS

The sentiment data chimes with national surveys and anecdotal evidence from firms released in the past week.

The GfK market research group, whose German consumer morale indicator was mired at an eight-year low in March, said last week consumers polled before the war saw an increased probability Europe's largest economy could slide into recession.

As the Commission sentiment report showed, concern about job cuts is weighing heavily on morale and deterring households from spending.

Most European consumers would rather save any extra income than spend it, according to a Ipsos survey released last week which polled shoppers in France, Germany, Britain, Spain, Italy, Portugal, Belgium, and the Netherlands.

"Europeans are accumulating financial reserves, and funds available in the short term have risen," Ipsos said.

Firms have not just been laying off workers but also postponing investment in equipment.

This was evident even in the run-up to the war in Iraq and drove German plant and equipment orders down by one percent in February from a year earlier, according to a report on Friday by German engineering association VDMA.

"No improvement in investments can be expected in the months ahead. Machinery manufacturers will have to be patient for some time," VDMA chief economist Olaf Wortmann said.

Economic theory says lower interest rates should make consumers less keen to save and also encourage firms to invest.

The ECB has sought to reassure jittery markets that it stands ready to help them operate smoothly, but its officials have suggested any further easing will not come just yet while there is so much uncertainty about the course of the war.

That is not soon enough for some, including a senior member of German Chancellor Gerhard Schroeder's ruling Social Democrats who last week accused the ECB of failing to act quickly enough to protect the euro zone economy from the impact of war.

"I think the (ECB's) stance of waiting before cutting rates significantly is completely irresponsible," SPD board member Sigrid Skarpelis-Sperk told Reuters last week.

The ECB was waiting "with its hands in its pockets" and putting the European economy at risk, Skarpelis-Sperk added.

Eurostat will next month release more detailed data on March inflation, including the monthly change in consumer prices.-Reuters