Italian business confidence fell to the lowest in two years this month as the region's third-largest economy probably entered its fourth recession in the past decade amid a wave of austerity measures designed to fight the debt crisis. The manufacturing-sentiment index dropped to 92.5, the lowest since December 2009, from 94 in November, Rome-based national statistics institute Istat said today.

The euro slid to a decade low against the yen and the lowest against the dollar since September 2010 as Italy sold three- and 10-year government bonds. European stocks erased gains, leaving the Stoxx Europe 600 Index little changed at 1 p.m. in London.

The euro and global stocks fell yesterday after the ECB published a report showing its balance sheet swelled to a record 2.73 trillion euros ($3.55 trillion) on increased lending to euro-area banks, highlighting risks from the debt crisis.

ECB policy makers next decide on interest rates on Jan. 12. All but one of 21 economists in a Bloomberg News survey expect them to hold rates steady at that meeting.

The central bank on Dec. 8 predicted that growth will slow to just 0.3 percent in 2012 from 1.6 percent in 2011. Inflation will average 2 percent next year — its definition of price stability — after 2.7 percent this year.

German Inflation

German inflation eased to 2.4 percent this month from 2.8 percent in November, the nation's statistics office said today.

“German inflation will come down pretty rapidly now and will probably be lower than the euro-area average next year,” said Cailloux, chief European economist at RBS in London. “This will make it easier for the ECB to keep cutting interest rates.”

Cailloux forecasts policy makers will lower the key rate to 0.5 percent by the end of the first quarter, with two quarter- point steps in February and March.

The annual growth rate in loans to European households and companies slowed to 1.7 percent in November from 2.7 percent in October, the ECB said today.

Euro-area inflation will slow to 2.8 percent this month from 3 percent last month, according to the median of 24 estimates in a Bloomberg survey. That report is due on Jan. 4.

In the U.S., a Labor Department report at 8:30 a.m. New York time may show that initial jobless claims climbed to 375,000 last week after falling to the lowest since April 2008 in the previous period, according to the median forecast of 32 economists surveyed by Bloomberg News.

Separate data may show U.S. pending sales of previously owned homes rose 1.5 percent in November after a 10 percent jump in the prior month, economists said before the report at 10 a.m. from the National Association of Realtors.

In Germany, the economy will probably avoid a recession even as orders from its main euro-area trading partners wane during the debt crisis, two economic institutes that advise Chancellor Angela Merkel's government said on Dec. 20.

“If the economic outlook darkens further, interest rate reductions toward 0.5 percent are conceivable,” said Marina Luetje, an economist at Dekabank in Frankfurt. “Our main scenario for interest rates is that the economic outlook doesn't worsen further, in which case the ECB will leave its main rate at 1 percent until the middle of 2014.”

Bloomberg News

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