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European retail sales dropped the most in more than four years in April as rising fuel and food prices squeezed shoppers' budgets, the Bloomberg purchasing managers index showed.

The measure of sales growth in the euro region declined for a second month to a seasonally adjusted 41.8 from 48.2 in March. A reading below 50 indicates contraction. The index, which is based on a survey of more than 1,000 executives compiled for Bloomberg News by NTC Economics Ltd., is at the lowest level since its introduction in January 2004. Sales also fell from a year earlier.

The fastest inflation in 16 years is squeezing retailers' margins and weighing on consumer spending while at the same time discouraging the European Central Bank from cutting interest rates. The European Commission yesterday cut its forecasts for economic growth this year and next in the 15-nation euro region.

“Rising inflation is hitting households' purchasing power and is undoing some of the positive stimulus, such as strong employment growth and rising wages,'' said Nick Kounis, an economist at Fortis Bank in Amsterdam. “The dilemma facing the ECB just gets worse.''

The euro fell almost half a cent after the retail sales report before recovering to trade at $1.5576 at 1:10 p.m. in Frankfurt.

Carrefour, Ikea Warning

Carrefour SA, the world's second-biggest retailer, and Ikea, the largest home-furnishings seller, said the industry is likely to suffer as global economic growth slows and commodity prices soar. Consumer companies have “never before faced so many challenges,'' Carrefour chief Jose Luis Duran said earlier this month at the World Retail Conference in Barcelona, Spain.

Sales fell across all three of the largest economies in the euro zone, led by Italy, where retail spending dropped at the fastest rate in the survey's history. In Germany, sales fell the most in three months, while in France they declined the most since January 2006.

“Italian indicators have been on a predictable and steady downward trend for the past year,'' said Morgan Stanley economist Vladimir Pillonca, who predicts Italy may be the first and only country in the euro region to enter into a recession this year.

Praktiker AG, Germany's second-largest home-improvement retailer, said April 23 that its first-quarter loss widened on weaker demand. Chief Executive Officer Wolfgang Werner said “the first three months were very bad in domestic sales.''

Sarkozy's Plan

Metro AG, Germany's largest retailer, today reported first- quarter operating profit increased about 14 percent as growth in Eastern Europe offset slowing sales at home.

While “rising real wages and rising employment will have a positive impact on Metro's German business,'' the dynamic in Western Europe “leaves something to be desired,'' Chief Executive Officer Eckhard Cordes said in a Bloomberg Television interview.

In France, “inflation and the end of the rise in real-estate prices, and of the ability to take on loans, are weighing on consumption,'' said Yann Lepape, an economist at Oddo & Cie. in Paris. “The trend is starting to go downward.''

French President Nicolas Sarkozy yesterday outlined measures to spur growth, including a push for price rebates at retailers, as accelerating inflation hurts consumer spending in the euro region's second-largest economy.

“Prices in supermarkets have increased more in France than in almost all other European countries,'' Sarkozy said last week in a nationally televised interview from the presidential palace. “That's not normal.''

Margins Shrink

Gross margins fell in April at the fastest rate in the survey's history as purchasing prices in Germany and Italy rose and sales missed targets to the second-largest extent on record, NTC said.

European consumer confidence fell to the lowest in more than two years in March, according to the European Commission. The commission yesterday forecast the euro-region economy will expand 1.7 percent this year and 1.5 percent in 2009, which would be the slowest since 2003. Last year it grew 2.6 percent.

By contrast, the International Monetary Fund predicts the U.S. economy will expand just 0.5 percent this year and 0.6 percent in 2009 amid a housing recession.

Defaults on U.S. subprime mortgages have caused about $309 billion in writedowns and losses at the world's biggest banks and financial institutions so far and pushed up borrowing costs globally.

ECB's Inflation Fight

While the Federal Reserve has lowered interest rates to bolster its economy, the ECB has left its benchmark rate at a six- year high of 4 percent to fight inflation.

NTC said a gauge of expected sales for the coming month increased to 59.1 from 53.3 in March, partly because food and drink retailers plan to raise prices.

Nestle SA, the world's largest food company, last week said first-quarter sales rose 6 percent after increasing prices by the most in a decade for products from Nescafe coffee to KitKat chocolate bars.

For the Bloomberg retail indicator, NTC recruited a panel of companies in Germany, France and Italy, which together make up around 75 percent of total euro-area retail sales by value. The panel includes large chain retailers as well as smaller stores.

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The U.S. probably lost jobs for a fourth month as the collapse in construction and a slowdown in consumer spending almost stalled growth, economists said before reports this week.

Payrolls fell by 78,000 in April, based on the median forecast in a Bloomberg News survey before the Labor Department's May 2 report. Figures two days earlier may show the economy expanded at a 0.4 percent annual pace from January through March, the smallest gain in five years.

“Despite our forecast for positive growth in the first quarter, we believe the economy has formally slipped into a recession,'' said Ethan Harris, chief U.S. economist at Lehman Brothers Holdings Inc. in New York. “Given the headwinds from the housing and credit markets, we expect spending to remain weak through the end of 2009.'' Harris projects a 0.7 percent growth rate for the first three months of the year.

Economists forecast spending rose last quarter at the slowest pace in 13 years as the loss of jobs, increase in food and energy costs, and drop in property values hurt confidence. The Federal Reserve may lower the benchmark interest rate by a quarter-point to try to stem further erosion in the growth.

The Labor Department's employment report may also show the jobless rate rose to 5.2 percent this month, the highest level in three years.

Factory payrolls fell by 35,000, according to the survey median. Construction firms, retailers and financial-service businesses may also have cut jobs.

Job Losses

Wall Street banks and securities firms, hit by $309 billion in mortgage losses and writedowns, have slashed 48,000 jobs in the past 10 months, led by cuts at Citigroup Inc., Merrill Lynch & Co., Lehman Brothers and Bank of America Corp, according to the Securities Industry and Financial Markets Association.

Merrill Lynch, the third-biggest U.S. securities firm, said April 17 it would cut about 3,000 more jobs after the credit- market crisis forced it to write down about $6.5 billion in debt.

“The employment report will clearly show the economy is in recession,'' said James O'Sullivan, a senior economist at UBS Securities LLC in Stamford, Connecticut. While a positive reading on first-quarter growth will stoke debate, “ultimately, what will determine whether we're in a recession or not is payrolls,'' O'Sullivan said.

A build-up in inventories as demand slowed and record exports helped to keep gross domestic product growing. While foreign demand will probably continue to be strong, the increase in stockpiles may mean companies will slow production and spending in coming months, hurting growth.

Contraction Ahead

Merrill Lynch economists last week forecast the economy would shrink at a 2.3 percent annual pace from April through June as consumer spending continues to slow, forcing companies to slash inventories.

“Contrary to popular opinion, the incoming data are, on net, getting worse, not better,'' Merrill's Chief North American Economist David Rosenberg said in an April 24 note to clients.

Fed policy makers are scheduled to meet on April 29-30 to discuss the economy and interest rates. So far this year, central bankers have cut the overnight lending rate between banks by 2 percentage points to 2.25 percent.

“The economy's gone soft, we know that, and the Fed is easing,'' said Kevin Logan, a senior market economist at Dresdner Kleinwort in New York.

Investors have been increasing bets in recent weeks that policy makers will pause after this week's cut, according to Bloomberg data, as concerns over inflation mount.

Spending Slowdown

Consumer spending in the first quarter probably rose at a 0.7 percent annual pace, the smallest gain since the first three months of 1995, according to the median forecast. The Commerce Department's estimate is due April 30 as part of its GDP report.

Manufacturing has also cooled as spending slowed. The Institute for Supply Management's factory index, due May 1, fell to 48 this month from 48.6 in March, the survey showed. A reading of 50 is the dividing line between expansion and contraction.

While down, manufacturing has so far performed better during this slowdown than in previous contractions as demand from overseas continues to grow. In February 2001, a month before the last recession, the institute's index was 42.1.

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Colorado’s insurance sector lost another political battle Thursday as the House Business Affairs and Labor Committee approved a bill that dramatically raises fines and penalties the state Division of Insurance can impose on insurers that "unreasonably" deny claims.

Sponsored by Rep. Andrew Romanoff, D-Denver, House Bill 1407 was approved in a party-line vote of 6-4 — following a sometimes-testy exchange between Democratic legislators and business leaders.

The bill applies to all forms of insurance including health, life and auto. It increases maximum penalties by up to 500 percent against insurers who unfairly deny claims. It also allows people whose claims are denied to collect up to two times the actual damages sustained.

Romanoff, who is the House Speaker, said the bill gives individuals a chance to recover their losses without resorting to costly and time-consuming litigation.

The legislation also changes the standard that the insurance commissioner needs to evaluate when weighing whether or not claims were inappropriately denied.

Under current law, the insurance commissioner needs to determine that insurers engaged in "willful, wrongful and reckless" behavior when denying a claim — a standard that Romanoff said is "hard to define."

Under HB 1407, the commissioner will only need to determine that insurers acted in an "unreasonable" manner. Romanoff said the new standard included in the bill gives the commissioner "a bigger stick to deter" unscrupulous insurers.

Supporters of the bill recounted heartbreaking stories of tragic circumstances, of denied claims and prolonged lawsuits against insurance companies that nearly resulted in bankruptcy — even after the courts ruled against the insurers.

The proponents maintained that HB 1407 would have spared them from what Romanoff described as "a Kafkaesque Hell."

But representatives of the insurance industry argued that the bill establishes a lower standard of guilt and force insurers to pay more claims — resulting in higher premiums.

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The number of California homes going into foreclosure jumped last quarter to its highest level in more than 15 years as the market continued to work its way through declining home values and a pool of at-risk mortgages originated in 2005 and 2006, a real estate information service reported.

Lending institutions sent homeowners 113,676 default notices during the January through March period, up by 39.4 percent from 81,550 the previous quarter and up 143.1 percent from 46,760 in the year-ago quarter, according to DataQuick Information Systems.

Last quarter's number of defaults was the highest in DataQuick's statistics, which go back to 1992.

Most of the loans that went into default last quarter were originated between August 2005 and October 2006. The median age was 23 months, up from 16 months a year earlier.

On primary mortgages, California homeowners were a median five months behind on their payments when the lender started the default process. The borrowers owed a median $11,474 on a median $346,750 mortgage.

On home equity loans and lines of credit, homeowners were a median eight months behind on their payments. Borrowers owed a median $3,512 on a median $60,000 credit line.

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The global economy can cope with rising crude prices, which may climb to as high as $120 a barrel in the coming week, Libya's top oil official said.

“For years we've been saying the era of cheap oil is over,'' Shokri Ghanem, chairman of Libya's National Oil Corp., said today in Rome before the International Energy Forum, which starts tomorrow. “None of us thought it would reach $115 a barrel so quickly, so it could reach $120'' this week.

The world economy “has not reached the tipping point where it can't accept higher prices,'' Ghanem said.

Crude oil futures have doubled in three years, touching a record $116.97 a barrel yesterday in New York. Member states of the Organization of Petroleum Exporting Countries have said there's enough supply in the market and price gains are the result of speculation and a weak dollar.

“OPEC is not pricing oil, it's the futures markets,'' Ghanem said. “We think supply is adequate.''

Customers aren't asking for more crude, Qatari Oil Minister Abdullah bin Hamad al-Attiyah said as he arrived in Rome today, blaming the plunging dollar for record prices. “The oil price rises as the dollar gets weaker.''

The U.S. currency sank 8.3 percent against the euro to $1.5983, an all-time low, on April 17.

Oil as Hedge

Saudi Arabia Oil Minister Ali al-Naimi said the rising price of crude is “absolutely'' unrelated to supply and demand fundamentals and is caused by investors using it as a hedge against falling currencies, according to a report in Argus.

Saudi Arabia, facing calls from oil-consuming nations to pump more crude, has no plans to raise output because increased supply wouldn't damp prices, Argus said, citing al-Naimi. The minister didn't comment as he arrived in Rome today.

Adding the country's spare supplies would “destabilize'' the market by flooding it with oil that isn't needed, al-Naimi said, according to Argus. Pressure to raise output is “probably politically driven.''

Saudi Arabia, the world's largest oil exporter and the only member of OPEC to have spare output capacity, can add more than 1.6 million barrels a day to production. The country pumped 9.2 million barrels a day in March, according to Bloomberg estimates. The other 12 members are close to capacity, Bloomberg data show.

Saudi Output Plans

The nation has no plans to raise output to more than 12.5 million barrels a day, which will be achieved by 2009, al-Naimi said. Projected oil consumption to 2020 doesn't require more crude from the country and estimates for demand are decreasing, he said. Saudi Arabia's King Abdullah said earlier this month that the nation's new oil discoveries must be saved for the benefit of future generations.

Bringing new oil capacity on-stream is becoming more expensive, at around $5,000 to $8,000 per barrel a day from $2,000 per barrel a day “in the past,'' al-Naimi said, according to Argus. The depletion rate of Saudi fields is 2 percent to 3 percent at most, he said, Argus reported.

United Arab Emirates Oil Minister Mohamed Al-Hamli also said in Rome today that the oil market is “adequately supplied.''

The International Energy Forum takes place every two years and is the largest gathering of energy ministers from oil- producing and consuming countries at a single event.

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The days of gas-guzzlers would soon be over if the majority of the responders to last week’s Business Pulse survey had their way.

We asked, "What impact will record gas prices have on your next car purchase?" Forty-eight percent of respondents said they’d buy a hybrid, 16 percent said they were interested in electric cars, 10 percent said they would take the bus and 26 percent said, none, they love their gas-guzzler.

Some of your comments:

• "Who can afford to buy a new car now? My next one may literally fly at the rate the economy and the dollar are tanking!"
• "All bad answer options! Prices will have an affect, but not to the extreme of a hybrid or electric car."
• "I was planning to purchase a hybrid for environmental reasons — if electric were a true option I’d be there — so that purchase isn’t gas price driven although it’s a motivator to do so sooner."
• "The problem is, we have a society built around the car. Do I sacrifice my career or uproot my life just to be green?"
• "You should have included an option for switching to a more fuel-efficient gas vehicle. We plan to give up one of our work vans and purchase a compact car, which we’ll use for errands and client meetings."

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BioTime Inc. is moving its headquarters from Emeryville to Alameda, the company said Wednesday.

The company and its subsidiary, Embryome Sciences Inc., will use the facility's lab space for the production and marketing of embryonic progenitor cells — which have the ability to develop into other cell types — progenitor cell lines and products derived from the embryonic cell lines.

BioTime will also work on developing new blood plasma volume expander products at the new research facility, which includes an 11,000-square-foot tissue culture lab that has been pre-certified for manufacturing by the Food and Drug Administration.

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The much-anticipated $17.7 billion Delta Air Lines Inc. merger with Northwest Airlines Corp. is done, in a deal that would create the world’s largest airline.

The airlines announced jointly at 8 p.m. Eastern Time Monday a merger that will keep the headquarters of the new Delta (NYSE: DAL) in Atlanta, will cause no hub closures and will help the carriers weather the pressures of rising fuel costs.

The new airline will have some $35 billion in revenue and about 75,000 employees. It will run a fleet of 800 airplanes that will provide access to more than 390 destinations in 67 countries.

Under the deal, each Northwest share will be exchanged for 1.25 Delta shares, a 16.8 percent premium based on today’s closing price.

The company expects one-time cash costs of no more than $1 billion to integrate the two airlines. But the deal is expected to generate more than $1 billion in annual revenue and cost cuts from more effective aircraft utilization, a more comprehensive and diversified route system, reduced overhead and improved operations.

Delta CEO Richard Anderson (also a former CEO of Eagan-based Northwest) will remain CEO of the new Delta, Delta Chairman of the Board Daniel Carp will become chairman of the new board, Northwest Chairman Roy Bostock will become vice chairman and Delta’s Ed Bastian will be president and chief financial officer.

"We said we would only enter into a consolidation transaction if it was right for all of our constituencies; Delta and Northwest are a perfect fit," Anderson said. "Today, we’re announcing a transaction that is about addition, not subtraction, and combines end-to-end networks that open a world of opportunities for our customers and employees. We believe by partnering with our employees, including providing equity to U.S.-based employees of Delta and Northwest, this combination is off to the right start. Together, we are creating America’s leading airline — an airline that is financially secure, able to invest in our employees and our customers, and built to thrive in an increasingly competitive marketplace."

The new Delta board will have 13 members — seven from Delta’s board, including Anderson, and five from Northwest’s board, including Bostock and Doug Steenland, the current Northwest CEO. One director will come from the Air Line Pilots Association (ALPA).

Delta will have executive offices in Atlanta, Minneapolis/St. Paul and New York, and international executive offices in Amsterdam, Paris and Tokyo. The company’s world headquarters will be in Atlanta.

The airlines said small U.S. communities will now have better access to more destinations across the globe and will benefit from the combined carriers’ complementary route networks. Delta and Northwest believe they have formed a global U.S. carrier that can compete with foreign airlines that are continuing to increase service to the United States.

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European Central Bank council member Guy Quaden predicted inflation will remain above the bank's 2 percent target in coming months, suggesting he sees little room to cut interest rates.

“The current level of inflation in the euro zone is well above our definition of price stability and the prospects for the coming months are not really reassuring,'' Quaden, who also heads Belgium's central bank, said in an interview in Washington yesterday.

The Frankfurt-based ECB this week left its benchmark interest rate at 4 percent after European inflation accelerated to 3.5 percent in March, the fastest pace in almost 16 years. Economists surveyed by Bloomberg News last week forecast policy makers would start cutting borrowing rates in the third quarter.

Fellow ECB council member Erkki Liikanen said in a separate interview in Washington that “it's very important'' the central bank brings inflation back below 2 percent within 18 months. Both officials said it was vital the bank control inflation expectations.

“Our current monetary stance and our policy rate are appropriate in order to anchor inflation expectations, which is our first duty,'' Quaden said. Liikanen said inflation “expectations must be anchored.''

The International Monetary Fund this week cut its forecast for economic growth in the euro-area this year to 1.4 percent from 1.6 percent and said the inflation rate will slow to 1.9 percent next year. The ECB “can afford some easing'' of interest rates, it said.

More Optimistic

Bank of France Governor Christian Noyer told reporters in Washington the ECB is more optimistic about the expansion and noted there is “not the slightest'' sign of a credit squeeze in its region.

The ECB's latest predictions, published in March, are for economic growth of 1.7 percent in 2008 and inflation of above 2 percent this year and next.

The inflation threat means the ECB will leave its key interest rate at its current six-year high until the end of the third quarter, according to the median forecast of 68 economists surveyed this week by Bloomberg News.

ECB council member Axel Weber told reporters in Washington on April 11 he didn't “see any room to cut rates given the current environment.''

Quaden said the European economy may slow as the U.S. teeters on the brink of recession. “It is difficult to believe that the economic activity in Europe will remain unaffected by the developments in the financial economy and in the real economy in the U.S.,'' he said.

While there was much “uncertainty'' surrounding the outlook for inflation, a slowdown in global economic growth should help restrain prices, he said.

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American Airlines Inc. canceled about 200 Saturday flights and said it plans to be back to a full, normal schedule by Sunday.

By late Friday afternoon, American had inspected and put back into service 231 of its 300 MD-80 planes. The Fort Worth-based airline said it expects most of the remainder of the fleet will be ready for service Friday night.

American spokesman Tim Wagner said the airline will have 75 percent of its MD-80 planes back in the air by Saturday morning and the entire fleet in service by late afternoon.

American canceled 595 flights Friday, the fourth straight day of aircraft groundings, to complete Federal Aviation Administration inspections of its MD-80 planes. Cancellations included 185 flights at Dallas/Fort Worth International Airport and 86 flights at Chicago O'Hare International Airport.

American, the world's largest airline, operates about 2,300 flights a day.

The carrier canceled more than 930 flights Thursday, including 269 flights at D/FW Airport and 123 flights at Chicago O'Hare. That followed 1,094 canceled flights on Wednesday and 460 cancellations on Tuesday.

American has said the inspections are related to detailed, technical compliance issues and not safety-of-flight issues. In particular, technicians are checking the bundling of wires in the wheel well of the MD-80 aircraft.

American said customers who were scheduled on a flight that was canceled may request a full refund or apply the value of their ticket toward future travel on the airline. Customers scheduled to travel on any MD-80 flight between April 8 and April 11, even if their flight has not been canceled, may rebook without a change fee to any American flight with availability in the same cabin as long as their travel begins by April 17.

Customers who have to stay overnight because of cancellations can go to AA.com where the airline has set up a link to request information about compensation. Most travelers received a $500 travel voucher to cover expenses.

American canceled hundreds of flights just two weeks ago for safety concerns on its MD-80 aircraft. About 300 aircraft were inspected for faulty wiring on the auxiliary hydraulic systems and 149 needed repairs.

American Airlines is a unit of Fort Worth-based AMR Corp. (NYSE: AMR).

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