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BERLIN: Business confidence dropped in Germany, France and Italy in September, according to survey results released on Wednesday, adding to fears that the euro zone is sinking into recession as the effects of U.S. financial turmoil spread across the Atlantic.
The Ifo institute's indicator of business confidence in Germany fell for a fourth consecutive month to reach its lowest level since May 2005, when economic problems prompted Gerhard Schröder to call early elections when he was chancellor.
Other surveys showed Italian corporate sentiment at record lows last seen after the Sept. 11, 2001, terrorist attacks against the United States. French business morale, meanwhile, plunged to its worst level in over five years.
Germany, France and Italy have the biggest economies among the 15 countries in the euro zone, together making up about two-thirds of its gross domestic product.
Analysts with Royal Bank of Scotland followed the data with a research note titled “Full-blown recession looming in 2009 in the euro area.” The bank cut its 2009 forecast for German gross domestic product to minus 0.1 percent from 0.6 percent. It also predicted that the European Central Bank, which remains focused on inflation risks, would be pushed to change its view. “The European Central Bank's realization that the euro area is headed for a recession will result in deeper” interest rate cuts next year, wrote Jacques Cailloux, an economist at Royal Bank of Scotland.
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The Italian data were collected in the first half of the month, but a substantial portion of the German and French responses came after troubles at Lehman Brothers and American International Group sent stock markets reeling last week. The turmoil has prompted the U.S. government to propose a $700 billion rescue package for the American financial sector, but Germany and other European countries have seen no need to replicate the U.S. plan for their own institutions.
The resulting tighter credit conditions are expected to constrain household consumption and corporate investment, even if Europe does not suffer the same financial upheaval under way in the United States.
“We can't disconnect ourselves from the negative developments stemming from the United States and the financial crisis,” said Gernot Griebling of Landesbank Baden-Württemberg .
Euro-zone government bonds edged higher after the Ifo data but the euro recovered after an initial fall against the dollar as traders awaited news on the fate of the U.S. plan.
Germany's main stock index, the DAX, has fallen more than 5 percent this month, while the DJ Stoxx index of European shares is down over 7 percent.
Ifo said its business climate index, which is based on a monthly poll of about 7,000 businesses, fell to 92.9 from 94.8 in August. More worrying was a sharp drop in the component of the index that measures corporate expectations for the next half year. That measure declined to 86.5, its worst reading since February 1993.
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