Turmoil in US hits confidence across Europe

EUROPEAN consumer and business confidence dropped more than expected in August to the lowest in six months after the crisis in the US housing market pushed up borrowing costs in Europe.

An index of sentiment among executives and consumers in the 13 nations that use the euro declined to 110 from 111 in July, the European Commission in Brussels said yesterday. That compares with the 110.3 median forecast of 25 economists in a Bloomberg News survey. Inflation held at 1.8 percent in August, according to a separate report.

The decline in confidence adds to arguments for the European Central Bank to refrain from raising interest rates next week. The euro-area economy expanded less than forecast in the second quarter, and growth in the manufacturing and service industries slowed in August as the pace of orders cooled.

"The ECB has been a little too optimistic about growth prospects," said Ken Wattret, senior economist at BNP Paribas in London. "The good is being offset by the bad."

Rising employment may support consumer spending and economic growth. The euro-area jobless rate held at a record-low 6.9 percent in July, the European Union's statistics office said in a separate report yesterday. The improvement in the labor market helped retailers post the first increase in sales in four months in August, according to a report published on Thursday.

Still, banks' reluctance to lend to each other as they assess losses stemming from US mortgage defaults may hamper expansion in Europe's economy by restricting access to financing for consumers and businesses.

Slower economic growth makes it harder for companies to increase prices. Inflation remained below the ECB's two percent limit for a 12th straight month in August, yesterday's data showed, which may reassure central-bank policy makers when they meet to decide on interest rates next week. The August inflation rate matched the median forecast in a survey of economists.

Consumers nonetheless expect inflation to pick up in coming months, according to the data. A gauge of price expectations over the next 12 months increased to 26 this month from 19 in July, the commission said.

ECB President Jean-Claude Trichet this week backed away from the rate increase he signaled on August 2, saying the bank must first assess the fallout from the credit-market rout. The central bank injected extra cash into the money markets after BNP Paribas halted redemptions on three funds.