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European household morale drops as fuel soars

PARIS - Household confidence, strained by sky-high fuel prices, slid in many parts of Europe in June, from Denmark up north to Italy down south, and juggernaut Germany was no exception, economic surveys showed on Tuesday.

France, continental Europe's second biggest economy, showed some resistance with business morale holding its ground in June and consumer spending surging surprisingly, as it did in Britain too despite signs there of a potentially serious housing slump.

Economists took that good news as the exception, and the bad news was in plentiful supply, not leastly when a junior minister in Germany said Europe's economy may even have contracted in the April-June period, hurt by a strong euro exchange rate.

A readout on U.S. June consumer confidence was due later on Tuesday (1400 GMT), as well as an update on how the collapsed housing market is faring with both morale and housing prices set to fall further.

FORGET THE GOOD NEWS

In Europe, the latest consumer reports showed steeper morale declines than financial market analysts forecast for Denmark and Italy in June, and a survey of the outlook for consumer spending in Germany in July was also weaker than experts foretold.

Market research group GfK said its forward-looking consumer sentiment index, based on a survey of 2,000 Germans, fell to 3.9 for July after a revised 4.7 for June, well below forecast.

"Spiralling energy costs and the threat of a further massive rise in the price of gas are increasingly dampening the consumer mood in Germany," the Nuremberg-based GfK said in a statement.

Denmark's consumer morale index hit its lowest level since February 1999 this month, dipping to -6.6 from -3.5 in May, the country's statistics office said.

Italian consumer confidence fell more strongly in June than any month since January and landed back nearer record lows, as Italians grew more gloomy about their personal finances and the state of the economy more generally.

Italian Research institute ISAE's seasonally adjusted consumer confidence index fell to 100.0 from 103.2.

A morale boost registered in May after Prime Minister Silvio Berlusconi's clear election victory appeared to have given way to renewed gloom, with inflation higher than it has been for more than a decade in Italy and at records in Europe generally.

After sometimes violent protests over food prices in much of the developing world in recent months, high retail fuel prices caused by crude prices at all-time records is fanning further protests in rich and poor countries alike.

In May, annual headline inflation rates hit 4.2 percent in the United States, 3.7 percent in the 15-country euro zone, 3.9 percent in the 27-strong European Union, and 3.3 percent in Britain. Rates are even higher in emerging market economies.

Inflation has become the most important issue for European Union citizens, a twice-yearly EU survey showed on Tuesday, nine days before the European Central Bank is set to raise interest rates to stem record price rises.

CATCHING COLD

Europe's economy grew strongly in the first three months of the year but economists maintain -- and an increasing number of politicians concede -- that that was the final flurry before Europe starts to a U.S.-induced downturn.

German gross domestic product expanded at a stellar rate of 1.5 percent in the first quarter from the last three months of 2007, but politicians are preparing for bad news now.

"Nil (growth) probably would be a good result for the second quarter," German Deputy Economy Minister Walther Otremba told reporters in Berlin on Tuesday. "It may even be negative."

Spanish Prime Minister Jose Luis Zapatero said earlier this week that growth in the euro zone's fourth-largest and erstwhile booming economy would be weak in the second quarter and start to recover in mid-2009.

In the meantime, he said, the state would hire 30 percent fewer public sector staff in 2009 and freeze wages for senior public servants -- something that may help ease fears at the European Central Bank that high food and fuel prices will trigger big pay demands and a 1970s-style inflation spiral.

Further signs of distress for the European economy emerged on Monday in monthly PMI surveys of company purchasing managers, readouts seen as a good real-time signal of what is going on.

The RBS/Markit Eurozone Purchasing Managers Index (PMI) for services companies, which range from cafes to banks, fell into the red in June, to 49.5 from 50.6 in May.

It was the first time in five years that it fell under 50 -- suggesting contraction.

Euro zone manufacturing also suffered a bruising month. The RBS/Markit Eurozone PMI for the sector fell to its lowest level since May 2005, to 49.1 from 50.6, as new orders slid further.

Even when France reported on Monday that household spending on manufactured goods such as cars and clothes rose 2.0 percent in May, its biggest monthly gain since January 2004, economists wrote the readout off as worthy but ephemeral.

"Good news is too rare to ignore these days but the health of the French economy is more than fragile," Alexander Law, chief economist at Xerfi, a consulting firm, said.

"There is a strong chance that there will be a correction in June given inflation is at a high level and there are growing pressures on households' purchasing power."