Business Confidence Slips in Germany

The Ifo Business Climate Index, which historically has been a good predictor of German economic performance, fell to its lowest level in August since June 2010, a sign that growth could be tapering off even before the country has made up the ground it lost during the sharp recession of 2009.

In addition, industrial new orders in the euro zone also fell more than expected in June from May, the European Union said Wednesday. The drop of 0.7 percent from the previous month was the latest in a string of indicators that have prompted economists to revise down their forecasts for euro zone growth.

“The economic risks have risen significantly,” Jörg Krämer, chief economist at Commerzbank, wrote in a note. “A recession will be the outcome if the sovereign debt crisis escalates,” he wrote, though he added that he expected political leaders to take steps to contain the crisis.

The Ifo climate index, based on a survey of German companies, fell to 108.7 in August from 112.9 in July, as managers grew more pessimistic about future business prospects. Analysts had expected the index to drop to 111.

The expectations component of the index, which also measures managers’ assessment of their current business, fell the most since October 2008, just after the collapse of Lehman Brothers.

“The German economy is not immune to current worldwide turbulence,” said Hans-Werner Sinn, president of the Ifo Institute for Economic Research at the University of Munich, which conducts the survey.

Global stock markets were battered last week by fears that Europe is headed for a sharp slowdown while political leaders are still struggling with the sovereign debt crisis. However, investors shrugged off the bad news Wednesday and Europe’s main stock indexes recorded measured gains. Germany’s DAX Index was up about 1 percent at midday.

Germany’s powerful economy has been helping to counterbalance slow growth in southern Europe, but the Ifo index provides more evidence the country may not be able to play that role at least for the next few months. If business people become more pessimistic, they tend to invest less in expansion, which subtracts from growth.

On the positive side, German employment has continued to rise, which should support consumer confidence. However, citizens may decide to save more than spend if they fear another downturn, Stefan Schilbe, an economist at HSBC in Frankfurt, wrote in a note.

The Ifo data “fits into the picture of a German economy losing momentum in the second half of 2011, compared to the first six months,” Mr Schilbe wrote.

Article source: http://www.nytimes.com/2011/08/25/business/global/business-confidence-slips-in-germany.html?partner=rss&emc=rss