Economic confidence sags across indebted eurozone

European economies made a nervous start to the week yesterday as a slew of metrics from Brussels added to fears of a muted recovery.

Although markets held steady despite Spain's credit downgrade on Friday, the European Commission figures showed that confidence in the region's economic outlook worsened sharply last month. Business lending also slowed and consumer price inflation hit a 17-month high, although it remained below the target set by Brussels.

The EC's economic sentiment indicator fell to 98.4 from 100.6 in April, amid fears about the Greek debt crisis and related austerity measures. Consumer confidence was the worst- affected indicator, falling to minus 18 in May from minus 15 in April. But business sentiment also fell across all sectors except for manufacturing.

Howard Archer, the chief European economist at IHS Global Insight, said: "The weakening in eurozone business and consumer confidence highlights the mounting downside risks to already pretty muted eurozone economic recovery."

In another sign of subdued activity, consumer price inflation throughout the eurozone rose slightly to 1.6 per cent but stayed below the target of just under 2 per cent. The current boost from higher energy prices is expected to tail off in coming months, and underlying inflationary pressures remain subdued with economic capacity underused and unemployment continuing to rise.

A separate EC report confirmed further month-on-month declines in lending to non-financial businesses, taking the year-on-year fall to 2.6 per cent in April from 2.4 per cent in March.