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Confidence In Euro Economy Falls To 5-Year Low

Economic sentiment indicator for the 15 countries that use the euro fell 2.5 points to 94.6 -- the lowest point since August 2003.

BRUSSELS, Belgium (AP) -- Confidence in the euro-zone economy dropped in June to its lowest level in nearly five years, a government survey said Friday, deepening an already gloomy growth outlook.

The report also causes a bigger headache for the European Central Bank as it tries to reign in inflation without squelching growth.

The European Commission's economic sentiment indicator for the 15 countries that use the euro fell 2.5 points to 94.6 -- the lowest point since August 2003, when the indicator stood at 93.4.

The report came amid record high oil prices and rising inflation across Europe, which is starting to have its affect on consumer spending, business investment and production.

It also intensifies the predicament of European Central Bank President Jean-Claude Trichet, who is keen to raise interest rates to combat rising prices. However, Friday's dropping economic confidence raises more questions about his inflation-cutting mission because higher interest rates could also slow down economic growth and consumer spending.

Worried about rising inflation in euro nations, Trichet has hinted strongly that the central bank will raise euro borrowing costs at its July 3 meeting.

He told EU lawmakers this week however that he refused to pre-commit to a rate hike and indicated that a series of increases may not be in the cards.

The ECB has so far left the rate unchanged at 4 percent since June 2007, in stark contrast to several rate cuts from the Bank of England and the U.S. Federal Reserve that aimed to boost the economy in the wake of the subprime crisis.

Increasing food and fuel prices drove yearly inflation in the euro zone to a new record of 3.7 percent in May, the highest since records started in 1996. This is well above the ECB guideline of just under 2 percent.

Friday's survey showed consumers, industry and builders all expected prices to go up in the months ahead.

Confidence indicators declined in all industry sectors except for services and a large majority of EU countries also saw indicators of confidence decline.

Spain registered a 6.2 drop for June, from 79.2 in May, while Germany fell 1.5 points to 101.5.

The Netherlands and Portugal were the only euro-area countries to see a marginal increase in confidence indicators and outside the currency zone, Britain and Slovakia also saw slight rises.

A survey of euro zone industry managers, the EU's business climate indicator also dropped in June to 0.14, from 0.58 in May. The European Union says industrial production growth weakened in the second quarter of 2008.

The indicators are compiled from surveys conducted by consumers and by EU nations in the industrial, services, retail trade and construction sectors.

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