Bloomberg News

German Business Sentiment Probably Fell to Lowest in 21 Months

December 20, 2011

Dec. 20 (Bloomberg) -- German business confidence probably fell to the lowest in 21 months in December on concern Europe’s worsening sovereign debt crisis will hurt companies’ earnings and tip the economy into recession.

The Ifo institute’s business climate index, based on a survey of 7,000 executives, will drop to 106 from 106.6 in November, the median forecast of 36 economists in a Bloomberg News survey shows. That would be the lowest since March 2010 and follows an unexpected increase last month. The institute releases the report at 10 a.m. in Munich today.

Germany’s economy will grow the least in three years in 2012 as the turmoil in Europe threatens demand in the country’s largest market, the Bundesbank said yesterday. Metro AG, the country’s biggest retailer, cut its 2011 sales and profit forecast, blaming “the increasingly noticeable effect” of the debt crisis.

“Germany has held up extremely well up to now but it would be unrealistic to expect that it can escape the slump that’s engulfing Europe,” said Carsten Brzeski, an economist at ING Group in Brussels. “However, companies are much better prepared than they were in 2008 and the economy will come out of the downturn faster than other countries.”

Ifo’s gauge of the current situation may have declined to 116 from 116.7, while an index measuring executives’ expectations probably fell to 97 from 97.3, the survey of economists shows.

Bundesbank Forecast

The Bundesbank forecast yesterday that economic growth will slow to 0.6 percent in 2012 from 3 percent this year before recovering to 1.8 percent in 2013.

It said its base scenario is that the debt crisis doesn’t worsen and that uncertainty among investors and consumers “gradually lessens.” The European Central Bank cut its 2012 euro-area growth forecast this month to 0.3 percent.

Some companies are counting on U.S. and emerging-market sales to offset the drop in European demand. Luxury car makers Bayerische Motoren Werke AG and Daimler AG said this month they will set up factories in Brazil and the U.S. respectively to help sustain growth. BMW Chief Executive Officer Norbert Reithofer said Dec. 16 that sales will grow in the U.S. China and Europe next year unless the global economy falters.

“We are better prepared for a potential crisis” than during the 2009 recession because of lower production costs and a better financial cushion, Reithofer said.

U.S. Demand

In the U.S., consumer spending probably climbed 0.3 percent in November as Americans flocked to auto dealer showrooms and shopped for holiday bargains, according to a Bloomberg News survey. The Commerce Department is due to publish the data on Dec. 23. The euro’s 10 percent decline against the dollar since the end of August may help German sales outside the currency region by making goods more competitive.

German domestic demand may be bolstered by unemployment at a two-decade low. Investor sentiment unexpectedly rose for the first time in 10 months in December and gauges of manufacturing and services activity unexpectedly increased.

As European governments struggle to find a lasting solution to a debt crisis that has pushed up sovereign borrowing costs and toppled five elected governments, the ECB has introduced a menu of measures designed to avert a credit crunch. It cut its benchmark interest rate to 1 percent this month, matching a record low, and is introducing three-year unlimited bank loans. The first of those loans will be alloted tomorrow.

“One aspiration is to have them financing the real economy, especially small- and medium-sized enterprises,” ECB President Mario Draghi said in an interview with the Financial Times published yesterday.

“This is a confidence crisis, not a crisis of Germany’s real economy,” said Christian Schulz, an economist at Berenberg Bank in London. “The next few months are going to be tough, but Germany will also be the first out of the starting blocks again.”

--Editors: Fergal O’Brien, Craig Stirling

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

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net


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