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Consumer confidence in Germany and Italy dimmed as soaring energy prices sapped households' purchasing power, adding to evidence that economic growth is faltering across the euro region.

GfK AG's index for July, based on a survey of about 2,000 Germans, fell to 3.9 from a revised 4.7 in June, the Nuremberg- based market-research company said today. That's the lowest in more than two years. Italy's Isae Institute's index slipped to 100 from 103.2 this month. In France, housing starts slumped and business confidence held at the weakest since December 2005.

Growth is slowing as higher oil and food prices spur the fastest inflation in 16 years. While consumers' purchasing power is being squeezed and the German government says its economy could contract this quarter, European Central Bank President Jean-Claude Trichet says policy makers may still have to raise interest rates.

“There aren't any signs of a turnaround on the horizon because energy and food prices are set to remain high,'' said Paolo Pizzoli, an economist for ING Bank NV in Milan. “The outlook for consumer spending remains gloomy.''

Oil prices reached a record $139.89 a barrel last week and traded at $137.59 a barrel today. Euro-region inflation accelerated to 3.7 percent in May.

GfK cut its forecast for German consumer spending growth this year to 0.5 percent from 1 percent due to “stiffening inflation'' concerns. Expectations for price increases, as measured by the so- called breakeven rates on five-year inflation-indexed bonds, were at 2.5 percent yesterday, up from 2.12 percent in March.

`Significant Slowdown'

Rome-based Bulgari SpA, the world's third-largest jeweler, said June 20 it has passed surging gold prices on to customers.

Higher credit costs and a stronger euro are also threatening Europe's economy. French housing starts dropped 21.6 percent in the three months through May from a year earlier and homebuilder Kaufman & Broad SA said on June 19 that first-half profit slumped because of a “significant slowdown'' in the French market faxless payday loans.

“We've got this plunge in housing permits,'' said Gilles Moec, an economist at Bank of America Corp. in London. “Gradually we'll see more of a subtraction to growth from consumption. It's been positive for years but I expect it to become clearly negative in 2008.''

At the same time, the euro has appreciated more than 15 percent against the dollar in the past year, eroding export competitiveness and damping economic growth.

German Contraction

Louis Gallois, chief executive officer of Airbus parent European Aeronautic, Defence & Space Co., last week said his company is on course to cut 2.1 billion euros ($3.3 billion) from annual spending to maintain its profit margins. Airplane sales are priced in dollars.

German Deputy Economy Minister Walther Otremba said in Berlin today that growth in Europe's largest economy “may even be negative'' in the second quarter after a rate of 1.5 percent between January and March. The single currency's gains are “rather negative overall,'' he said.

In France, an index of sentiment among 4,000 manufacturers held at 102 in June, the weakest in more than two years.

“Increasing inflation fears, the ongoing crisis in financial markets, the euro's strength and the global economic slowdown have led consumers to assess the economic outlook less optimistically,'' GfK said.

For now, ECB policy makers say the economy is still strong enough to cope with higher borrowing costs. Trichet says the need to rein in price expectations may persuade the bank to raise its key interest rate by a quarter-point to 4.25 percent next month to curb inflation.

“The question is whether this will be a shot across the bow, or one and done,'' said Klaus Baader, chief European economist Merrill Lynch and Co. in London. “That's actually unlikely because there is a significant inflation problem.''

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