German business confidence dropped sharply in May, a closely-watched survey showed Thursday, as anxiety grows in Europe's largest economy over the increasing financial turmoil in the 17-country eurozone.
The Ifo index survey of business executives dropped from to 106.9 points in May from 109.9 points in April, the largest fall since last August. The decline was also steeper than analysts had been predicting.
The drop came even though Germany's own economy is doing relatively well. It grew by 0.5 percent in the first quarter compared with the previous three-month period. In contrast, seven euro countries are in recession, including Italy and Spain, while France only posted flat growth.
However Ifo president Hans-Werner Sinn said the drop in his organization's headline index indicates that "the German economy is being influenced recently by the growing uncertainty in the eurozone."
The businesses' assessments of their current situation and expectations for the coming months both dropped. The current assessment component fell to 113.3 points, its lowest level since July 2010, while the expectations component dropped to 100.9 points, taking it back to January's level.
"For last couple of months, it had seemed that the Ifo index painted a too positive growth picture _ today's Ifo reading has corrected this picture in one fell swoop," said Carsten Brzeski, an economist with ING in Brussels. "German businesses have woken up to reality: islands of happiness might exist, economic islands within the eurozone hardly."
Already last week, the ZEW survey of German investors showed that market concerns over the European economy were growing, dropping sharply to 10.8 points in May from 12.6 points after five straight months of increases.
In its report, ZEW said investors believe "the outcome of the elections in Greece and France has made it more doubtful that European governments will resolutely fight the sovereign debt crisis."
Brzeski said he still expects the German economy to grow, but at a significantly slower pace than it has recently, adding that businesses are now seeing the picture with "more realism and lower expectations."
"With austerity-driven slowdowns coming to most other core eurozone countries, an obvious cooling of the Chinese economy and a still not very dynamic U.S. recovery, export growth should clearly come down," he said. "Moreover, hopes for more domestic consumption on the back of higher wage could easily be disappointed when exporters see market shares dropping."
Ifo's results are based on a monthly survey of some 2,500 companies.