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Europe's slowing economy may drag on U.S.

Europe's economic outlook blackened Thursday, raising questions about its ability to help prop up the United States' own feeble economy by buying its goods.
/ Source: The Associated Press

Europe's economic outlook blackened Thursday, raising questions about its ability to help prop up the United States' own feeble economy by buying its goods.

Business confidence in the euro currency zone's two largest economies, France and Germany, plummeted as business leaders grow more pessimistic about growth prospects.

The closely watched Ifo survey of German business confidence fell to its lowest point in nearly three years in July. In France, business confidence sank to its lowest level since May 2005, with executives reporting rising inventories, falling orders, and higher expectations of inflation.

The dark clouds extended beyond the euro zone to Britain. Retail sales slumped in June by the biggest margin in more than 20 years, indicating that British consumers too are cutting back spending amid accelerating inflation and slowing economic growth. Sales volumes fell 3.9 percent last month, the largest decrease since records began in January 1986.

As the U.S. has struggled with tighter credit, a teetering financial system, collapsing home prices and rising costs for fuel and food, Europe's economy has been relatively stronger. That and the weak dollar has helped make Europe a market for products from U.S. industries that export overseas, such as cars, planes, drugs and food. For many U.S. companies, exports have been a bright spot in an otherwise gloomy environment.

In Germany, the Munich-based Ifo institute's business climate index fell to 97.5 points in July from 101.2 points in June, a steeper decline than analysts had expected.

"In manufacturing the business climate index has fallen noticeably," Ifo president Hans-Werner Sinn said in a statement.

"Satisfaction with the current business situation has declined among the survey participants. They also anticipate weaker business in the coming six months," he said.

Andreas Rees, an economist at UniCredit said the trend was not reassuring. "The Ifo index is now falling like a stone and the worst might be yet to come," Rees wrote in a research note.

Rees blamed high oil prices for eating into consumer purchasing power and slowing exports — a key motor of the German economy. While the bank still doesn't consider a recession as its "baseline scenario," UniCredit's Rees said he expects "a strong dip."

"The risks have risen substantially," he said.

France's official statistics agency Insee reported that business confidence fell to 98 in July from 101 in June. A reading of 100 represents the index's long-term average. "Given the industrialists' outlook for their own production, business will continue to slow down over the coming months," Insee said.

"The outlook for the French economy darkens by the day," Bank of America economist Gilles Moec said in a note to clients. "We think that gross domestic product growth stagnated in the second quarter and will probably continue to do so in the third quarter," Moec said.

While volatile conditions in France's large automobile and aircraft industries are often blamed for fluctuations in business confidence, this month "the survey reveals that pessimism is widespread across sectors," Moec said.

Order books contracted for the fourth month running, according to Insee, with the largest drops coming in the capital goods and consumer goods sectors.

The survey "indicates that France is on its way to losing the two main engines, corporate investment and consumer consumption," Global Equities' chief economist Marc Touati said in a note.

"Given that housing investment and exports have already dried up, there's is little left to support French growth," Touati said.