European confidence in the economic outlook improved more than economists forecast in October, led by a jump in sentiment among manufacturers.

An index of executive and consumer sentiment in the 16 euro nations rose to 104.1 from 103.2 in September, the European Commission in Brussels said in a statement today. That’s the highest since December 2007 and exceeded economists’ forecast for a reading of 103.5, based on the median of 26 estimates in a Bloomberg News survey. Manufacturers grew more confident as orders and output improved.

European manufacturing growth accelerated in October and business confidence in Germany, the region’s largest economy, unexpectedly increased. Nevertheless, euro-region recovery may weaken as a stronger euro and faltering global demand hurt exports and governments cut spending. Volkswagen AG, Europe’s largest carmaker, said on Oct. 22 that earnings growth will probably weaken in the fourth quarter.

“It’s undoubtedly the case that activity is slowing,” said James Nixon, co-chief European economist at Societe Generale SA in London. “With the euro appreciating and the global economy weakening, the trend in confidence indicators may be down from here with slower growth in the fourth quarter.”

A gauge of sentiment among manufacturers rose to 0 in October from minus 2, while services confidence held at 8, today’s report showed. The index of consumer confidence remained at minus 11 and a gauge of sentiment among builders rose to minus 25 from minus 26.

German Boost

The euro was little changed against the dollar after the report and traded at $1.3831 as of 10:01 a.m. in London from $1.3769 yesterday.

The euro-region economy may expand 1.7 percent this year after shrinking 4.1 percent in 2009, the International Monetary Fund said on Oct. 6. In Germany, Europe’s largest economy, gross domestic product will probably rise 3.3 percent this year, more than twice the increase projected for France, it said.

Germany has fueled the region’s recovery as governments from Spain to Ireland struggle to push down budget deficits. It’s economy grew 2.2 percent in the second quarter, more than twice the euro-area average.

While the euro has depreciated 6.1 percent against the dollar over the past year on investor concern about Europe’s debt crisis, a weaker currency has helped boost export growth. L’Oreal SA, the world’s largest cosmetics maker, said on Oct. 21 that third-quarter sales increased 15 percent, more than analysts forecast, partly because of a weaker euro.

Outlook

The euro has rebounded since hitting a four-year low in June, and is up 1.7 percent over the past month. Companies may also struggle to maintain earnings growth as households hold back spending and the global recovery cools. In the U.S., the world’s largest economy, factory output unexpectedly declined in September for the first time in more than a year.

European manufacturers’ capacity utilization rose to 77.6 percent in the fourth quarter from 77.2 percent in the previous three months, the commission said in today’s report. That’s the highest since the fourth quarter of 2008.

The commission’s gauges measuring orders rose to minus 12 this month from minus 16 in September, while gauges of export orders and output expectations also increased, today’s report showed. An index of employment expectations rose to 0 from minus 3. Among services executives, a gauge of demand expectations for the next three months rose to 11 from 10 and a gauge measuring price expectations also increased.

The European Central Bank on Oct. 7 kept its benchmark interest rate at a record low of 1 percent after last month extending emergency liquidity measures for banks into 2011.

“The European economy as a whole is now on a stable path toward recovery,” ECB council member Axel Weber, who also heads Germany’s Bundesbank, said on Oct. 12. “I’m confident that the danger of sliding back into recession is negligible.”

The ECB’s council is scheduled to hold its next policy meeting on Nov. 4 in Frankfurt.

Bloomberg