Hopes of economic recovery dim with war

  • 2003-04-03
  • Elahe Merel

Confidence in Europe's economy suffered its worst slump since 2001 in March, according to a European Commission report issued on the last day of March, fueling fears of a recession as war clouds spread gloom over a hoped-for recovery.

"Such a drop in confidence has not been observed since the events of Sept. 11, 2001," said the commission, the EU's executive arm, issuing updates on key economic indicators.

The EU's Business Climate Indicator decreased by more than 0.3 percentage point, to minus 0.60 point, in "the strongest decrease since its last trough at the end of 2001," said the commission.

The slump was due to falls in "all components" of the indicator, including production levels and order books. "The economic short-term outlook has deteriorated markedly," said the EU executive.

Meanwhile, the economic Sentiment Indicator also suffered its biggest dip in 18 months, falling by 0.6 percentage points in March in both the 12-nation euro zone and the 15-member European Union.

The ESI fell to 98 points in the EU, and to 97.8 points in the euro zone. It dropped in all member states except for Luxembourg and the Netherlands, where it remained unchanged, and Portugal where it rose by 0.3 percentage point.

The new source of gloom came barely two weeks after the commission warned that euro-area growth would be stagnant or could even plunge into recession because of war on Iraq.

Economic and Monetary Affairs Commissioner Pedro Solbes, in a quarterly report on the 12-nation zone in mid-March, said growth was "significantly weaker" than previously predicted. Brussels has already slashed its growth forecast for this year to barely 1 percent.

Solbes admitted that even this 1-percent figure "presupposes a return of confidence in the second-quarter" of this year.

Analysts say the economic outlook will remain clouded so long as the war on Iraq continues -which could be longer than expected, as the U.S.-led coalition suffers stiff Iraq resistance.

The new commission data were based on information gathered mostly before the outbreak of war.

"It seems that the approach of war was already undermining both business and consumer confidence," said Jean-Francois Mercier, an economist with Schroeder Salomon Smith Barney.

"One cannot rule out a further deterioration in confidence as the conflict looks likely to last longer than some had initially anticipated -and markets react in consequence," he said.

Another piece of bad news came on March 31 with confirmation by Eurostat, the EU's statistical office, that inflation remained stubbornly high at 2.4 percent, above the 2 percent comfort level set in the euro zone.

"Overall today's reports, with weakening confidence and high inflation, are the worst-case scenario for the euro zone," said Jodie Saul of CIBC World Markets.

"Looking further ahead, with the war in Iraq taking longer than many had hoped, and the possibility that this is jeopardizing the economic recovery, the outlook is not good, and confidence may indeed weaken again," she said.

Solbes acknowledged that euro-zone growth would remain "anemic" this year, but he predicted it would "pass 2 percent" in 2004.

He said that for the moment the gtroup of seven richest industrialized nations had no immediate need to take steps to offset the risk to their economies posed by war in Iraq.

But he admitted that "we will have to follow events very closely."