(For more on Europe’s debt crisis, see EXT4.)
Oct. 21 (Bloomberg) -- German business confidence probably fell in October to the lowest since the first Greek bailout in May last year as the euro region’s worsening debt crisis threatens to push the economy into recession.
The Ifo institute’s business climate index, based on a survey of 7,000 executives, will drop to 106.2 from 107.5 in September, according to the median forecast of 42 economists in a Bloomberg News survey. The Munich-based institute releases the report at 10 a.m. in Munich today.
European leaders, due to meet in Brussels on Oct. 23, are under pressure to find a solution to the turmoil that has pushed Greece to the brink of default and is now threatening banks across the 17-nation euro area. German investor confidence slumped to a three-year low this month and the benchmark DAX share index has dropped 19 percent over the past three months, reflecting concern that company earnings may suffer.
“It is vital that a solution is found as soon as possible to avoid a credit crunch that will really hurt German companies,” said Christian Schulz, an economist at Joh Berenberg Gossler & Co. in London. “Overall, the economy is still in good shape and we won’t have a very deep recession, but what started as a mere confidence crisis is spreading.”
Ifo’s gauge of the current situation may decrease to 116.5 from 117.9, while an index measuring executives’ expectations probably fell to 97 from 98, the survey of economists shows.
While Germany’s Bundesbank on Oct. 17 predicted “strong” growth in the third quarter due to a rebound in industrial production and private consumption, it said the outlook has deteriorated.
Germany’s top economic institutes on Oct. 13 cut their 2012 forecast for growth by more than half, though they and said Europe’s largest economy will probably avert a recession. Growth will slow to 0.8 percent next year from 2.9 percent in 2011, they said in a bi-annual report commissioned by the government. In April, the group forecast 2 percent growth for 2012.
Vossloh AG, a German manufacturer of railroad equipment, cut its full-year sales forecast on Sept. 29, citing slower business in China and a “sharp reduction” in orders from southern Europe. Deutsche Bank AG on Oct. 4 scrapped its profit forecast and announced 500 job cuts and further writedowns on Greek bond holdings.
“Since the debt crisis has now become a bank crisis, the chances of recession are much higher,” Tobias Blattner, an economist at Daiwa International in London, told Ken Prewitt on Bloomberg Radio’s “The First Word.” “We’re expecting a technical recession at the beginning of next year.”
Some 17 months after Greece was first bailed out by euro- area nations, governments are still struggling to find a lasting solution to a crisis that has since engulfed Ireland and Portugal and is now threatening Italy and Spain.
A French-German split over the European Central Bank’s role in a rescue plan threatens to stymie progress on delivering the comprehensive strategy demanded by global leaders. France favors creating a bank out of the region’s rescue fund, allowing it to boost its financial clout by borrowing from the ECB -- a proposal that Germany rejects.
The crisis has made banks wary of lending to each other. Banks parked 182 billion euros ($251 billion) with the Frankfurt-based ECB overnight on Oct. 19, up from 172 billion euros the previous day.
Rising employment may help shield the German economy from turmoil and bolster consumer demand. German unemployment declined more than economists forecast in September, pushing the jobless rate to 6.9 percent, the lowest since the country’s reunification two decades ago.
Thomas Lindner, head of Germany’s VDMA machine makers’ association, said on Oct. 18 that the industry is struggling to find enough skilled workers and forecast plant and machinery output to increase 4 percent next year. SAP AG, the world’s largest maker of business-management software, on Oct. 14 reported third-quarter earnings that beat analysts’ estimates.
Jens Sondergaard, an economist at Nomura International Plc. in London, said it’s now up to leaders to help bolster business confidence at their weekend meeting.
The crisis “is really weighing on sentiment,” he said. “If you are pessimistic you’d say it’s already too late. The question is whether they can cut the Gordian Knot in the next 72 hours.”
--With assistance from Kristian Siedenburg in Vienna. Editors: Simone Meier, Matthew Brockett
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