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Business confidence tipped to slump

25 March 2004

BERLIN – Germany’s key business confidence index is widely expected to drop in March for the second consecutive month, reinforcing the pessimistic outlook for Europe’s biggest economy and raising fresh doubts about the prospects for the current global economic upswing.

Based on a survey of 7,000 executives, the Ifo index, to be released Friday, is forecast by economists to have dipped to 95.7 points after slipping to 96.4 points in February.

Drawn up by the Munich based Ifo economic institute, the index is one of Europe’s major economic indicators.

Signs that the recovery may have stalled is also likely to add to renewed speculation that the European Central Bank will be forced to cut rates possibly as early as next week in a bid to keep the 12- member eurozone economy on course to growth.

In the run-up to next Thursady’s meeting of the ECB’s 18-head rate- setting council, bank chief Jean-Claude Trichet said the bank may have to cut its economic growth forecasts if consumer demand fails to pick up, adding to speculation that a rate cut could eventuate as early as next week.

While the depreciation of the euro and a considerably higher number of work days should have supported sentiment, the noticeable decline in equities and worrisome US data should have dented it, said Elga Bartsch, European economist with the US investment house Morgan Stanley.

As was the case in February, the Ifo index fall in March is predicted to be largely a result of the report’s expectations component.

Analysts also noted that the March Ifo survey was held against the backdrop of higher oil prices and the Madrid terrorist bombings and their aftermath, which resulted in renewed talk of further terrorist outrages in Europe.

According to Ifo about 60 percent of responses to its questionnaires were outstanding at the time the bombs exploded in four Madrid commuter trains earlier this month. But coming on the back of weaker-than-expected data out of the US, a fall in the Ifo’s March reading could throw into question the prospects for the global economic upswing and consequently highlight concerns that the current upturn has now reached its peak.

A string of sentiment surveys released ahead of the Ifo report have added to concerns that Europe’s long-awaited economic upturn might be running out of steam with the Madrid bomb blasts also taking their toll on consumer sentiment.

Reports released this week show consumers in France, Italy and the Netherlands remaining very wary about the current economic and political climate with consumer confidence in Italy the eurozones third biggest economy – stuck at a ten-year low in March.

It is probable that the Madrid attacks had a greater impact on Italian consumers than 11 September because a European country was directly involved, said the Rome-based Isae institute, which prepared the report.

Along with the now deposed conservative Spanish government, Italian Prime Minister Silvio Berlusconi was one of Washington’s staunchest supporters in the US-led war in Iraq.

However, the consumer confidence sentiment surveys were followed by the release of reports showing an unexpected rise in business confidence in both Belgium and Italy in the wake of the decline of the euro and which have raised hopes that worries about the Madrid attacks might be overdone.

But marking out the changing economic mood, February’s decline in the Ifo index was the first in 10 months with the survey having gained strength last year as optimism grew that the international recovery would help to haul Germany out of three years of economic stagnation.

The Ifo’s fall follows another leading German sentiment survey, the so-called ZEW report, which surveys more than 300 analysts and institutional investors, chalked up its third monthly fall in March, also partly as a result of the Madrid bombings.

Compiled by the Mannheim-based Centre for European Economic Research, the ZEW index is considered to act as something of a curtain raiser to the more broadly based and closely watched Ifo report.

If the world economy started stuttering along with the US economy, the German recovery might stall, said ZEW president Wolfgang Franz.

In releasing the March index last week, the ZEW also said that although experts still believe that economic recovery will continue there are doubts as to whether the speed of recovery can be maintained.

With many analysts still expecting the euro to again test the crucial USD 1.30 mark this year, those responding to the ZEW survey also pointed to strength of the euro as their principal concern down the track.

The build-up to release of the Ifo report has also been accompanied by signs of faltering business confidence in Germany with key industrial production and factory orders in the world’s second biggest export nation also falling.

At the same time, several of the nation’s leading economic institutes and private economists have been revising down their 2004 growth forecasts to well below two percent.


Subject: German news