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Business confidence in Germany and France, which account for about half the euro-region economy, slumped in April as record oil and food prices stoked inflation.

The Munich-based Ifo institute said its business climate index, based on a survey of 7,000 executives, fell to 102.4 from 104.8 in March. That's the lowest since January 2006. In France, sentiment among 4,000 manufacturers slid to a 16-month low of 106 from 108, Insee, the Paris-based national statistics office said.

The euro fell more than a cent against the dollar on the reports, which reinforced concern that the fastest inflation in 16 years is curbing purchasing power and also preventing the European Central Bank from lowering interest rates. With the euro's 9 percent gain against the dollar this year threatening exports and the U.S. housing recession pushing up credit costs worldwide, the International Monetary Fund this month cut its growth forecast for Europe.

“Everything is worrying for executives: raw material prices climbing almost uncontrollably, the euro's rise, the global slowdown that's shaping up,'' said Bruno Cavalier, an economist with Oddo & Cie. in Paris. “There's every reason for growth to deteriorate.''

The euro-region economy will expand just 1.4 percent this year after 2.6 percent growth last year, the Washington-based IMF said April 9. That would be the slowest expansion since 2003.

Worse Than Forecast

The euro fell to $1.5748 at 1:40 p.m. in Frankfurt from $1.58.47 this morning. Economists had predicted a smaller decline in the Ifo index to 104.3, while the gauge of French optimism was expected to hold at 108.

Italian consumer confidence held near the lowest level in four years and Dutch consumer sentiment declined to the lowest in more than two years, reports showed today. In Belgium, business confidence dropped to a two-year low.

A sharp slowdown in Europe will damp inflation and force the ECB to cut interest rates within six months, the IMF's European Director, Michael Deppler, said in an interview on April 21.

The ECB is reluctant to follow the U.S. Federal Reserve in cutting borrowing costs to bolster the economy after inflation accelerated to 3.6 percent in March. The Frankfurt-based central bank aims to keep the rate below 2 percent.

Food-price inflation in Europe accelerated to 6.2 percent in March from 5.8 percent in the previous month. That's the highest since the European Union's statistics office, Eurostat, began the current data series in 1997. The prices for rice, soybeans, wheat and corn have all risen to records this year.

Higher Rates?

Crude oil reached a record of $119.90 a barrel on April 22 bad credit payday advance.

Policy makers including Germany's Axel Weber and Juergen Stark have suggested the ECB's current benchmark rate of 4 percent may not be high enough to combat inflation.

Today's reports “will dampen those remarks that an interest- rate increase will be needed,'' said Matthew Sharratt, an economist at Bank of America Corp. in London. “They are evidence of a moderation in euro-region growth.''

A gauge measuring German executives' assessment of the current business situation declined to 108.4 in April from 111.5 in March, Ifo said. An indicator measuring expectations for future business dropped to 96.8 from 98.4.

European companies are also grappling with the euro's appreciation, which is making exports less competitive just as the U.S. economy, one of Europe's biggest trading partners, teeters on the brink of a recession.

The U.S. housing slump has resulted in losses and writedowns at the biggest financial institutions of about $290 billion so far. That's made banks reluctant to lend, pushing up the cost of credit and threatening to curb global growth.

German Resilience

“Of course, we're in an environment where one or the other order is pushed back,'' Karl-Heinz Streibich, chief executive officer of Software AG, Germany's second-largest software maker, said in an interview on April 22. “Overall, German manufacturers are not yet feeling any spill-over effects from the U.S. crisis.''

The BDI industry federation, representing companies such Siemens AG, Europe's largest engineering company, said April 21 the German economy, Europe's largest, will expand about 2 percent this year after 2.5 percent growth in 2007.

The BGA exporters association yesterday reiterated its forecast for 5 percent growth in German sales abroad in 2008 even after the euro reached $1.60 for the first time.

“It's remarkable how robust the German economy is,'' BGA President Anton Boerner said. “Order backlogs are well filled into the second half.''

German companies are benefiting from booming demand for their goods in emerging economies. Volkswagen AG, Europe's largest carmaker, said yesterday that first-quarter profit rose 26 percent on rising sales in markets including China and Brazil.

Chief Executive Officer Martin Winterkorn said he's “optimistic'' VW will achieve targets for 2008 “even if conditions remain difficult.''

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