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Euro zone investor sentiment drops to 5-year low

BERLIN - Investor morale in the euro zone fell in August to its lowest level since July 2003 as concerns about inflation and the strong euro weighed on sentiment, a survey showed on Monday.

The Sentix group's monthly index of sentiment in the 15-nation euro area, based on a poll of more than 2,800 European investors, fell to -15.3 from -9.3 in July. A Reuters poll of economists had pointed to a reading of -10.0 ECONDE.

Expectation of a deterioration in the labour market was one reason for the erosion of sentiment.

‘Furthermore, the 'known problem children' inflation and a strong euro contributed significantly to the clouding over of sentiment,’ Sentix said in a statement.

Official data released on Monday showed euro zone producer prices rose at a record annual rate of 8.0 percent in June on soaring energy costs.

The yearly figure, up from 7.1 percent in May, was the highest since measurements started in 1991 and added to gloomy news for the European Central Bank three days before its monthly rate-setting meeting.

The ECB is expected to leave interest rates at a seven-year high of 4.25 percent on Thursday amid mounting evidence of a slump in euro zone economic growth and record inflation.

A Sentix gauge of current conditions fell to 0.0 from 11.75 in July, while a measure of expectations declined to -29.50 from -28.25 in July. The latest Sentix poll was conducted between July 31 and Aug. 2.

Earlier, a top economist and leading industrialist were reported as saying German businesses were experiencing dwindling orders and were likely to cut back production later this year as a result. Germany is Europe's largest economy.

‘Company expectations are really bad. There is a lack of new orders. Many companies will reduce capacity little by little, and also lay off workers,’ Kai Carstensen, head of the Ifo research institute's economics department, told newspaper Bild.

Martin Kannegiesser, president of the Gesamtmetall metals and electrical engineering employers' association, struck a similar tone.

‘The global economic slowdown is hitting the metals and electrical industry increasingly hard. In many companies, there are only sufficient orders to last until the end of the year,’ Kannegiesser told the mass-selling daily Bild.

In the corporate sector, German carmaker BMW BMWG.DE said last week it would miss its 2008 targets, following rival Daimler with a profit warning as higher oil and raw materials costs, combined a weaker US economy, hit the auto sector.

German government spokesman Thomas Steg told a regular news conference the government had no plans to revise its growth forecasts for this year and next. The government has forecast growth of 1.7 percent this year and 1.2 percent next year.