Rome, March 25 (Bloomberg) -- Italy and France, together accounting for almost 40 percent of the euro region's $7 trillion economy, showed signs of stagnation amid rising unemployment and war in Iraq. The Italian state-funded Isae institute's index of business optimism, one of the first monthly gauges of European executive sentiment, fell to 92.8 in March from 93.7 in February. French shoppers spent 0.5 percent less in February than the previous month, the government said. Europe's economy is faltering as mounting job losses and war in Iraq erodes demand among consumers, whose spending is more than half of gross domestic product. At the same time, the euro's 22 percent increase against the dollar in the past year is making exports less attractive. The region's economy may contract this quarter, the EU estimates. ``The economic outlook is still clouded,'' Flavio Pasotti, chief executive of plastic-mold maker Stylmeccanica SAS, whose customers include Fiat SpA, said in an interview. ``This will be a tough year after two years of stagnation. There's going to be lots of cost-cutting.''
Orders to Italian companies fell to the lowest since August while demand from foreign customers dropped to a 14-month low, the confidence report showed. Prospects for a rebound in production also faded, according to the survey of 4,000 executives. In other countries, confidence among Belgian executives tumbled to the lowest since the September 2000 terrorist attacks, the central bank said yesterday while a survey of Dutch households showed confidence at a two-decade low.
German Ifo Survey
The Munich-based Ifo institute's index of German business confidence, which has declined for seven of the past nine months, will probably show a reading of 89 in March, little changed from 88.9 in February, analysts said. The survey is released tomorrow. European stocks fell on concern a longer and more costlier war than some investors anticipated will further slow economic growth. The Dow Jones Stoxx 50 Index dropped 1.1 percent to 2179.9 at 12:10 p.m. in Rome. The yield on the 3 1/2 percent French government note maturing in 2004 fell 3 basis points to 2.40 percent. A basis point is 0.01 percentage point. Companies from Fiat to Alcatel SA and France Telecom SA are cutting jobs. Italy's unemployment rate of 8.9 percent is the third-highest among the Group of Seven industrialized nations. France's jobless rate is 9.1 percent, the highest in 2 1/2 years.
`Very Weak Scenario'
``Sales still aren't falling, but they've slowed down a lot,'' Philippe Lemoine, co-chairman of Galeries Lafayette SA, France's largest department store owner, said in an interview. ``We are basing our investment budgets and cost structure on a very weak scenario this year.'' The Italian survey, conducted before the start of the U.S. and British campaign to oust Iraqi leader Saddam Hussein, showed that 14 percent of the companies surveyed planned to cut jobs, while only 10 percent planned to add workers. Isae surveyed Italian mining and manufacturing companies from March 3 to March 14, asking about output, orders, prices, inventories and jobs. Its index, which is adjusted for seasonal variations, peaked at 116 in 1973. The low was 53 the next year. In the U.S., consumer confidence fell this month to the lowest in almost a decade as the job market weakened and gasoline prices surged before the war with Iraq, economists said they expect a private group to say. The Conference Board, a New York research group, will probably report a reading of 62 in its consumer confidence index, from 64 in February, according to economist surveyed by Bloomberg News. The drop would be the fourth in a row and would put the index at the lowest since 60.5 in October 1993, when the U.S. was struggling to emerge from the 1990-1991 recession.
Roach Sees Recession
A drop in consumer confidence stemming from the war in Iraq could push the U.S., European and Japanese economies into recession this year, said Stephen Roach, chief economist at Morgan Stanley in New York. ``The war occurs at a time when the industrial world was already weak,'' Roach told reporters in Beijing. ``Late last year growth slowed to a virtual standstill in the industrial world. That's true of Europe, true of the United States, and it's even true of Japan.''
The economy of the dozen nations sharing the euro may contract this quarter after expanding 0.7 percent last year, the slowest pace since 1993, the European Union's executive branch estimates. The EU last week cut its forecast for 2003 growth to about 1 percent. Exports, which account for about a fifth of the region's economy, gained 0.3 percent in Germany in the fourth quarter, compared with 2.9 percent from July through September. In France, exports fell in the final three months of last year.
`International Tensions'
``The international tensions aren't doing anyone any good. We sell durable goods, and people are less likely to buy our products with the war going on,'' said Giordano Zucchi, chairman of Vincenzo Zucchi SpA, Europe's largest maker of household linens such as towels, blankets and table cloths. Ducati Motor Holding SpA, the Italian maker of the Monster 602 and Testastretta motorcycles, said net income tumbled 39 percent in 2002 after shipments to North America dropped by more than quarter. Ferrari SpA, the sports car unit of Fiat SpA, said profit dropped 54 percent in 2002. //www.quote.bloomberg.com