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Italian Consumer Confidence Drops to 6 1/2-Year Low

24/06/2003 12:03
Italian consumer confidence dropped to its lowest in more than 6 1/2 years amid rising unemployment, bringing Europe's fourth-biggest economy closer to a recession.

An index based on a survey of 2,000 households by the Rome- based Isae institute in the first two weeks of June, fell to 104.9 from 105.6 in May. Economists predicted a gain. The survey is the first monthly measure of consumer confidence in Europe.

Italy's economy contracted in the first quarter as the euro's advance against the dollar choked exports. Job cuts at companies such as Fiat SpA are weighing on consumer spending, which accounts for about two-thirds of gross domestic product. Germany, Italy's biggest trading partner, also shrank in the first three months.

``The situation is a disaster,'' said Bernabo Bocca, president of Confturismo, which represents almost 30,000 Italian hotels and tour operators, in an interview. ``Everything is worse than it was six months ago.''

Italy's unemployment rate probably rose for the second month in April to 9.1 percent, the highest in a year, economists expect a government report on Thursday to show. Fiat, Italy's biggest manufacturer, and tire producer Pirelli SpA have already eliminated 10,000 jobs and Fiat, struggling to stem losses, may announce another 10,000 jobs reductions this week, analysts said.

Italian stocks fell for a second day. The benchmark Mib30 Index shed 19 points. September Mib30 futures slipped 0.1 percent to 25,565 with 885 contracts traded.

`Stubborn' ECB

Germany and Italy make up almost half the euro region's GDP. The European Central Bank predicts the economy of the dozen countries sharing the euro may grow as little as 0.4 percent this year after stalling in the first quarter.

ECB policy makers trimmed the benchmark interest rate on June 5 to 2 percent, the lowest since at least 1948, in a bid to spur demand. The central bank didn't act fast enough, according to Confindustria, Italy's biggest employers body.

``In spite of the weakness of the economy and the consistent strengthening of the currency, the ECB proved to be very stubborn about loosening monetary policy,'' Giulio Caprariis, co-chief economist at Confindustria, said last week.

The lobby lowered its forecast for economic growth this year by almost half to 0.8 percent, citing the euro's appreciation and Germany's economic woes. Fiat, Italy's biggest manufacturer, said the euro's advance shaved 500 million euros from first-quarter sales. Benetton SpA, Volkswagen AG and Philips Electronics NV have also blamed the euro for eroding sales.

Tourism Slump

Gucci Group NV Chief Executive Officer Domenico De Sole said last week the euro's exchange rate is damaging the European luxury goods industry. The third-biggest luxury goods group sells 20.5 percent of its products to the U.S.

Italians are growing more concerned that their disposable income is being eroded by rising prices and a strong currency, Isae said. Italy's inflation rate stayed unchanged in June at 2.7 percent for the fourth month straight as restaurants and supermarkets propped up prices, offsetting declines in energy costs, reports from 12 cities showed last week.

``The twin worries are that jobs are scarcer and prices are still high,'' said Luigi Speranza, an economist at BNP Paribas SA in London. ``There can't be spending under these conditions.''

Tourism, accounting for about 5 percent of the Italian economy, has been mired in its most serious crisis since the Sept. 11 attacks as tighter budgets and the outbreak of SARS keep American, German and Asian tourists away. Revenue from tourism will drop 10 percent to 65 billion euros in 2003 and put 100,000 jobs at risk, according to Confturismo.

U.S. Confidence

``I haven't caught a whiff of a dollar in months,'' said Rosa Pezzano, who runs fashion store Blue Sand in central Rome. ``I have worked in this shop for 20 years and I don't think I've ever seen the situation this bad.''

European businesses looking to the U.S. for signs of recovery may be disappointed. U.S. consumer confidence may have slipped in June amid concerns that unemployment is rising, economists said before a private group's report today. The Conference Board may say its consumer confidence index fell to 82 in June from 83.8 in May, a survey of economists showed.

The U.S. Federal Reserve will this week lower interest rates to help foster a recovery and ward off the threat of deflation, economists predict. All but 11 of the 155 economists and analysts surveyed by Bloomberg News expect a reduction in the Fed's benchmark rate to below 1.25 percent.