Consumer and business sentiment in the eurozone plunged to a record low in February, heightening fears that the recession is tightening its grip on the 16 nations that use the single currency.

The economic sentiment indicator, published by the European Commission, fell by 1.8 points to 65.4 this month, the lowest level since the series began in 1985. The wider gauge of sentiment for the 27 nations in the European Union also plunged to a record low of 61.

This was the third consecutive monthly fall for both indexes, which are now well below the long-term average of 100 points. The readings disappointed analysts who had hoped that the fall in confidence had bottomed out.

Howard Archer, of IHS Global Insight, said: “The further deterioration in economic sentiment in February bodes ill for investment, employment and consumer spending across the eurozone over the coming months, and suggests that the region is likely to see further marked contraction in the first half of the year at least.” Some analysts forecast that eurozone GDP will fall by as much as 3 per cent this year. However, one glimmer of hope emerged as consumers’ inflation expectations remained low, easing the way for more interest rate cuts by the European Central Bank.

The fall in confidence affected all sectors of the economy except retail, which recorded a rise of a single point.

The worsening plight of the eurozone economy was underlined as private sector lending stagnated. An indication of this steep decline in the growth of lending came as new figures showed that the annual growth rate in money supply fell sharply from 7.5 to 5.9 per cent.

As unemployment rises and the global economic turmoil continues, analysts fear that banks will become even more conservative in their lending, acting as a dampener on any potential recovery in 2010.

Ben May, European economist at Capital Economics, said: “The eurozone banks are becoming increasingly reluctant to lend and we think this could prompt bank lending to decline by about 10 per cent over the next couple of years. Falling bank capital looks set to prompt a sustained contraction in loans to households and firms, suggesting that any economic recovery in 2010 will be modest at best.”

There are anxieties that the increasing economic woe across the eurozone will inflame political tensions, particularly as countries in emerging Europe plunge into economic turmoil.

Richer eurozone countries have so far resisted calls to contribute more to the International Monetary Fund to fund aid schemes. The IMF yesterday renewed its calls for member countries to double the lender’s resources as more countries turned to it for aid.

The scale of the deepening gloom engulfing emerging economies came as Standard & Poor’s, the credit ratings agency, this week downgraded Ukraine’s sovereign credit rating. Although Ukraine is not in the EU, the move has added to concerns of a “domino effect”, with the difficulties faced by countries in the region leading to added pressure on Western European economies. Latvia and Romania have already had their ratings downgraded to junk status.

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