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Eurozone economic sentiment hits 6-year low in March

By Swaha Pattanaik

BRUSSELS, March 31 (Reuters) - Euro zone economic sentiment fell to a six-year low in March, as business and household morale both suffered badly even before war broke out in Iraq.

A European Commission indicator released on Monday recorded its biggest drop since the 11 September 2001 air attacks on the United States, compounding the gloom caused by growing job cuts and faltering economic growth in the 12-nation bloc.

The data was mostly collected by member states in the first two-and-a-half weeks of March, before the US-led war on Iraq began on March 20.

Consumer confidence fell more than expected to plumb a nine-year low and business confidence declined to its lowest since September 2002.

This is expected to add to pressure on the European Central Bank to cut interest rates in the coming months, even though separate data showed inflation held steady at 2.4 percent in March, surpassing the ECB's self-set two percent ceiling for the eighth month running.

"It is dire," said Ken Watrett, chief euroland market economist at BNP Paribas in London.

"The war is a factor but over and above that consumer sentiment is being hit by the fact that unemployment is rising, so it is a double whammy. This is going to be a major concern for the central bank given that consumer spending is key for recovery."

He said he expected the ECB to hold fire until May but added: "The macroeconomic case for a rate cut is very strong."

OUTLOOK GRIM

The economic sentiment indicator fell to 97.8 in March from February's revised 98.4. Consumer confidence fell more than expected to minus 21 from minus 19 in February while business confidence hit minus 12 from minus 11.

"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."

A separate indicator on the business climate in the euro zone also fell, plumbing a seven-month low which boded ill for the future, according to the Commission.

"The recent evolution of the (business climate indicator) indicates that the economic short-term outlook has deteriorated markedly," the European Union executive said.

"This decrease was driven by negative developments in all the components of the indicator such as production trends in the recent past, production expectations, total order books and export order books. Only stocks of finished products improved slightly."

SAVING IN VOGUE

The Commission reports chime 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