July 28, 2008 / 11:26 AM / 12 years ago

More bad news for European economies

BERLIN/MADRID (Reuters) - Europe was hit by another wave of bad economic news on Monday, with surveys showing German consumer confidence worse than at any time since recession last struck and yet more house price falls in Spain and Britain.

A cyclist passes a sign encouraging people to buy new apartments in Manchester, July 8, 2008. REUTERS/Phil Noble

Economists said high food and fuel costs were hurting German morale more than pay rises were helping it, compounding the risk that domestic demand would fail to compensate for weaker foreign demand for German goods as downturn hits other countries too.

While world oil prices eased in recent days, they are still roughly 40 percent higher than at the end of last year.

Market research company GfK said German consumer confidence, which it measures in monthly surveys of 2,000 people, dropped to its lowest since June 2003, when the gross domestic product of Europe’s largest economy last shrank for a brief period.

“German consumers are increasingly becoming depressed,” said Carsten Brzeski, an economist at Dutch bank ING.

The forward-looking GfK consumer sentiment indicator fell for a third month running, to 2.1 for August from a downwardly revised 3.6 in July.

“With inflation eroding households’ purchasing power, a substantial recovery in consumer spending has now become very unlikely,” said Martin Lueck, economist at UBS.

That followed news last week that German business confidence as measured by the Ifo index registered its biggest fall in July since the September 11, 2001 attacks on the United States and bigger slides than anticipated too in France and Italy.

MORE HOUSE GLOOM

Spain and Britain produced further evidence of the downturn in housing markets which hit the U.S. before spreading to parts of Europe where building and liberal mortgage lending gave the biggest boost to the economy in recent years.

Spain’s statistics office said house sales there plunged 34 percent year-on-year in May as households baulked at borrowing rates which have hit 8-year highs.

The pace of the decline reverted to the striking levels seen earlier in the year after a somewhat milder drop of 7.1 percent in April.

Spanish house prices could drop by up to 30 percent in real terms in coming years, according to Spanish property firm Colonial and other industry executives.

That is partly due to a glut of up to 1.5 million unsold homes after years of overbuilding, property firms say.

House sales in May tumbled to 50,161 units and mortgage lending plummeted 40 percent year-on-year.

In Britain, figures from a government agency showed house prices in England and Wales fell 1.0 percent on the month in June.

The Land Registry said house prices were just 0.1 percent higher than a year ago last month — the 10th month of slowing annual price growth and underlining the slowdown in the housing market.

Earlier on Monday, property consultants Hometrack said house prices were 4.4 percent lower than a year ago in July. That was the biggest annual fall since its survey began in 2001.

The fear there is that a collapse in house prices will cause broader economic trouble because of the extent to which consumer spending was buoyed in recent years by both the need to furnish houses and the ease with which people had access to credit.

Despite a sharply decelerating rate of economic expansion, Spain remains plagued by high inflation levels that are making life difficult for households and for policymakers.

Spanish Economy Minister Pedro Solbes said on Monday that his country’s inflation rate could rise even further, after hitting a 13-year high of 5 percent in June.

The Spanish government slashed its economic growth forecasts for this year and next last week, to 1.6 percent and 1.0 percent respectively, from previous targets of 2.3 percent for both years.

For the euro zone as a whole, short-term prospects have taken a marked turn for the worse as well of late.

A Reuters poll of over 80 economists, conducted from July 16 to 22, showed they forecast zero economic growth over the three months to end-June after a healthy 0.7 percent rate of growth in the euro zone in the first three months of 2008, quarter-on-quarter.

Writing by Brian Love, with reporting from Madrid, Berlin and London bureaux; Editing by Malcolm Whittaker

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