Bloomberg News

German Business Confidence Probably Declined to Eight-Month Low

June 23, 2011

June 24 (Bloomberg) -- German business confidence probably declined to the lowest level in eight months in June as Europe’s worsening sovereign-debt crisis and a faltering global recovery clouded the economic outlook.

The Ifo institute’s business climate index, based on a survey of 7,000 executives, will drop to 113.4 from 114.2 in May, according to the median forecast of 39 economists in a Bloomberg News survey. That’s the lowest since October. The institute releases the report at 10 a.m. in Munich today.

Europe’s largest economy may struggle to maintain its growth momentum as the region’s governments seek to avert a Greek debt restructuring and the U.S. economy shows signs of cooling, eroding confidence among executives and investors. Still, the Bundesbank raised its 2011 economic growth forecast on June 20, calling the recovery “broad based.”

“The economy has definitely peaked, but then there were already signs of overheating,” said Tobias Blattner, an economist at Daiwa International in London. “The outlook for growth is still excellent but it’s no wonder executives got a bit spooked by the Greek crisis which is dragging on.”

The sentiment indicator had reached 115.4 in February, the highest since records for a reunified Germany began in 1991. In June, Ifo’s gauge measuring the assessment of the current situation probably fell to 120.8 from a record 121.4, while an index of executives’ expectations dropped to 106.3 from 107.4, the Bloomberg survey shows.

‘Contagion Risk’

The Bundesbank forecast economic growth of 3.1 percent this year after a record 3.6 percent in 2010. In 2012, the expansion may weaken to 1.8 percent, it said.

The International Monetary Fund on June 17 lowered its forecast for global growth to 4.3 percent from 4.4 percent, citing concern about a setback in the U.S. recovery and potential contagion from Europe’s fiscal crisis. IMF Chief Economist Olivier Blanchard said there’s a risk of defaults.

European authorities are still bickering over ways to support Greece and prevent the spillover to other markets. The European Central Bank and the German government have clashed over how much investors should contribute to alleviating Greece’s debt load, which reached 143 percent of gross domestic product in 2010.

“We’re still at a point of actually dealing with contagion risk,” Bill O’Neill, chief investment officer for Europe at Merrill Lynch Global Wealth Management, told Bloomberg Television’s Andrea Catherwood on June 22 from Dublin. “I certainly don’t see a Greek involuntary default in the near term. It simply is too high a risk.”

Domestic Demand

Some companies have already signaled concern about tougher austerity measures hurting earnings.

“The worsening debt crisis in several European countries is affecting our business more and more strongly,” Fritz Oesterle, chief executive officer of Stuttgart-based Celesio AG, Europe’s biggest drug wholesaler, said on June 16.

The German economy is showing signs of slowdown after expanding 1.5 percent in the first quarter. Manufacturing growth weakened this month and investor confidence dropped to the lowest in 2 1/2 years. German exports fell in April.

With governments stepping up budget cuts and cooling global growth hurting exports, companies may rely on reviving domestic demand to bolster sales. Unemployment declined for a 23rd month in May, lowering the jobless rate to 7 percent. That’s the lowest since records for a reunified Germany began.

‘Pretty Solid’

Volkswagen AG and Porsche Automobil Holding SE are poised for further “distinct growth” even with global conditions “challenging,” CEO Martin Winterkorn said on June 17. Volkswagen, Europe’s largest carmaker, may have another “very successful” year in 2011, he said.

Services growth unexpectedly accelerated in June, indicating “German demand could serve as an anchor of the wider euro-zone economy,” said Christian Schulz, an economist at Joh. Berenberg Gossler & Co. in London.

“Domestic demand in Germany remains pretty solid,” said Ken Wattret, chief euro-area economist at BNP Paribas SA in London. “Germany is one of the few large European economies to have the potential for broad-based growth.”

--Editors: Simone Meier, Fergal O’Brien

To contact the reporter on this story: Gabi Thesing in London at gthesing@bloomberg.net

To contact the editor responsible for this story: Matthew Brockett at mbrockett1@bloomberg.net


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