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German Business Confidence Fell for a Fourth Month in August

August 27, 2012

German Business Confidence Fell for a Fourth Month in August

A sale sign sits outside a Galeria Kaufhof store in Munich, Germany. Photographer: Michael Nagle/Bloomberg

German business confidence fell for a fourth straight month in August as the sovereign debt crisis curbed growth in Europe’s largest economy.

The Ifo institute in Munich said its business climate index, based on a survey of 7,000 executives, dropped to 102.3 from 103.2 in July. That’s the lowest reading since March 2010. Economists predicted a decline to 102.7, according to the median of 37 forecasts in a Bloomberg News survey.

German economic growth slowed to 0.3 percent in the second quarter from 0.5 percent in the first as the debt crisis damped demand for exports and prompted companies to postpone investments. While sales to faster-growing markets outside Europe and domestic spending are helping to insulate Germany from the turmoil, the Bundesbank said last week that the prevailing uncertainty may cause the economy to cool further.

“Recent economic data are not encouraging,” said Jens- Oliver Niklasch, an economist at Landesbank Baden-Wuerttemberg in Stuttgart. “The construction industry as well as the export industry will see a slowdown in the months to come.”

Ifo’s gauge of the current situation eased to 111.2 from 111.5 in July, while a measure of executives’ expectations fell to 94.2, the lowest since June 2009, from 95.5.

The euro rose after the report to trade at $1.2523 at 11 a.m. in Frankfurt, up 0.1 percent today.

Debt Crisis

The debt crisis has driven up borrowing costs in Spain and Italy, threatening the survival of the euro and undermining confidence in Germany, which sells about 40 percent of its exports to the euro area.

German capital investment fell 0.9 percent in the second quarter from the first, with spending on plant and machinery down 2.3 percent and construction spending falling 0.3 percent, a breakdown of gross domestic product showed on Aug. 23.

Commerzbank AG (CBK), Germany’s second-largest bank, said Aug. 9 that profit will fall “significantly” in the second half of the year as slowing economic growth results in higher loan-loss provisions and mutes clients’ demand for services.

Financial markets rallied after European Central Bank President Mario Draghi pledged to do whatever is needed to preserve the euro. On Aug. 2, he said the ECB may intervene in bond markets to lower yields in Italy and Spain if those governments request aid from the region’s bailout fund.

Domestic Demand

The European Commission forecasts a 0.3 percent contraction for the 17-nation euro economy this year. By contrast, the Bundesbank in June raised its 2012 growth forecast for Germany to 1 percent from 0.6 percent, citing domestic consumption.

Unemployment remains at a two-decade low of 6.8 percent as German companies tap faster-growing markets outside Europe.

Bilfinger Berger SE (GBF), a German construction company and maintenance provider, on Aug. 21 forecast profit will increase this year, with Chief Executive Officer Roland Koch saying it is focused on growing its business abroad.

The euro’s 13 percent decline against the dollar in the past year is also helping exporters by making their goods cheaper overseas.

“If an economy goes into recession, like the euro zone is, the currency weakens and that’s quite natural,” Kai Carstensen, an economist at Ifo in Munich, said in an interview on Bloomberg Television’s The Pulse with Caroline Hyde. “That helps exporters, especially German exporters, even though German exports are not as price sensitive as many believe.”

The Bundesbank said in its monthly report published on Aug. 20 that as long as demand for German products from non euro-area countries remains essentially intact, a reversal of the cyclical growth trend in Germany is “highly unlikely.”

“Private consumption is still growing and Germany is still a big player when it comes to exports,” said David Milleker, chief economist at Union Investment GmbH in Frankfurt. “However, the weak investment dynamic is a big concern, and this is why managers are becoming more pessimistic.”

To contact the reporter on this story: Stefan Riecher in Frankfurt at sriecher@bloomberg.net

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


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