German business optimism drops 5th month in row

AP News
Posted: Sep 24, 2012 12:48 PM
German business optimism drops 5th month in row

FRANKFURT, Germany (AP) — Business optimism in Germany fell for the fifth month in a row, a closely-watched survey showed Monday, in another sign that Europe's debt crisis is weighing on the continent's largest economy.

The Ifo index dipped to 101.4 in September from 102.3 in August. The consensus in the markets was for no change. The index, based on a survey of 7,000 businesses, is what economists call a leading indicator — it provides clues to where the economy is going in the coming months.

Germany's government is in relatively good financial shape and its economy has performed strongly over the past couple of years when compared to the other 17 countries that use the euro as their currency.

The country is Europe's economic powerhouse with a €2.6 trillion ($3.36 trillion) gross domestic product, the region's largest. The German economy grew 0.3 percent in the second quarter from the quarter before, but some economists see the country heading for a recession in the second half of the year.

Fully 43 percent of Germany's exports go to its euro partners and the troubles in the single currency zone are worrying businesses and consumers in Germany. Growth is also stalling across the other 16 countries in the eurozone. Fears are mounting that Germany's economic clout will not be enough to stop the region from falling into recession.

Concerns over the eurozone debt crisis eased after European Central Bank President Mario Draghi announced a plan to buy government bonds of indebted countries, such as Spain and Italy, if they agree to take steps to reduce their deficit.

But growth prospects for the currency union remain weak. Governments are cutting spending to reduce debt, withdrawing stimulus from their economies and sending unemployment higher.

On top of that, the high interest rates on government bonds in Spain and Italy — driven up by default fears — have filtered through to corporate borrowing, meaning businesses in those countries face an added burden of elevated interest costs for the credit they would need to invest and expand.

"Today's Ifo index shows that German companies remain skeptical about the economic impact of Mario Draghi's magic," ING analyst Carsten Brzeski said.

"Despite fears of a looming eurozone breakup clearly fading away, German businesses are downscaling their expectations. The structural adjustments in Germany's eurozone trading partners will take time and will dampen demand for German products."

Other analysts think the country will escape without a recession.

Holger Schmieding, chief economist at Berenberg Bank, said monthly data such as the Ifo could be volatile, and that other indicators such as surveys of purchasing managers supported the view that Germany could still avoid recession.

The Ifo index is right at its long-term average, measured since 1995, of 101.4 points despite the recent decline.

"The drop in Ifo business confidence is a potent reminder that the outlook for the German and eurozone economies still hangs in the balance," Schmieding said.