Global Economic Confidence Drops on Market Turmoil, Oil Surge

By Simon Kennedy
July 16 (Bloomberg) -- Confidence in the world economy slumped this month as a yearlong financial crisis engulfed the biggest U.S. mortgage lenders and the oil price jumped to a record, a survey of Bloomberg users on six continents showed.
The Bloomberg Professional Global Confidence Index fell to 10.3 from 21 in June and sentiment deteriorated in every region. A figure below 50 indicates negative sentiment and this month's reading was the weakest since the survey began in November. It was conducted between July 7 and July 11.
``A number of economies are now verging on the edge of recession and the financial market stresses have not gone away,'' said Dominic Bryant, an economist at BNP Paribas SA in London who participated in the survey. ``It's clear the U.S. is going through a torrid time and that's denting the outlook for growth everywhere.''
The world economy is slowing as inflation forces central banks to raise interest rates and the worst U.S. housing recession in 25 years erodes confidence in its financial institutions. Global stocks tumbled into a bear market last week as Fannie Mae and Freddie Mac become the latest victims of the credit squeeze.
Survey participants in the U.S. predicted that stocks will extend this year's decline and that the dollar will continue its slide below $1.60 per euro. The MSCI World Index of global stocks has dropped more than 20 percent since its October record and yesterday fell to a two-year low.
Global Economy
The survey collated the responses of 5,450 Bloomberg users from London to New York on conditions in their region and the world. Respondents in Spain were the most pessimistic about their own economy, while participants in Brazil were alone in expressing optimism. The survey also included questions about bonds, currencies, stocks and interest rates over the next six months.
The U.S. housing slump last year sparked a credit market rout that's still rippling through the global economy. Higher borrowing costs are causing housing-led expansions to crumble in the U.S. and Europe, and banks have recorded more than $415 billion in losses and writedowns.
The market crisis worsened over the past week amid concern Fannie Mae and Freddie Mac don't have enough capital to survive the housing downturn. That forced Treasury Secretary Henry Paulson on July 13 to seek authority to buy unlimited stakes in the companies and lend to them.
Policy makers are also combating inflation just as global growth slows. The price of oil almost doubled in the past year and Federal Reserve Chairman Ben S. Bernanke said yesterday that inflation risks have ``intensified.''
Challenging Year
``The world economy is facing a challenging second half of the year,'' said Kenneth Broux, an economist at Lloyds TSB Group Plc in London who participated in the survey. ``The big question is whether the U.S. economy slows from here on the back of higher oil prices and the crisis at the mortgage lenders.''
Investors, analysts and traders in the U.S. were less optimistic about growth than in June. A measure of confidence in the economy fell to 8.8, the lowest since March, from 16.1. An index of dollar sentiment dropped to 45.4 after two months above 50. The measure for equities fell to 28.4 from 35.4.
The dollar has lost 14 percent of its value against the euro in the past year, declining to a record $1.6038 yesterday.
U.S. respondents trimmed expectations that the Fed will raise interest rates by the end of the year, with the relevant index slipping to 57.4 from 60.4. Bernanke yesterday signaled policy makers are unclear about the direction of rates because the risks to both growth and inflation have increased.
ECB Split
Those surveyed in Western Europe were the most worried about the outlook for their economy since the survey began. Their regional index dropping to 15.5 from 22.3. The 15-nation euro area may have contracted last quarter for the first time since the single currency began trading in 1999 and investor confidence in Germany fell to a record low in July.
Respondents split over the direction of the euro. Those in Germany and France predicted it will continue to rise and participants in Italy and Spain say it will decline.
Bloomberg users in Spain, where a decade-long housing boom has collapsed, were the most downbeat about their own country. Most European respondents say the European Central Bank, which raised its key rate to a seven-year high of 4.25 percent this month, won't cut interest rates.
In the U.K., faith in growth and stocks waned and respondents reversed their forecast for rate cuts.
Asian respondents were the most pessimistic about the global economy, with their measure falling to 7 from 19.4 and the index for the region dropping to 19.8 from 31.8. Sentiment among those surveyed in Japan toward their own economy fell to 13.3 from 20.2. Participants in South America were more confident in their region than in the global economy and the index for the continent was at 29.8.