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German businessconfidence slumps

Published on 24/02/2004

24 February 2004

MUNICH – German business confidence posted its first fall in 10 months in February according to a survey of 7,000 executives released Tuesday as industry worries about the strong euro continued to grow.

The Munich-based Ifo economic institute said its index for German business sentiment stood at 96.4 points in February, which compares to 97.5 points in January.

“It’s a warning signal for the economic cycle going forward,” Rainer Guntermann, senior European economist with the investment house Dresdner Kleinwort Wasserstein told Deutsche Presse-Agentur dpa.

Analysts had predicted that the closely watched index, which is one of Europe’s key economic indicators, would level out in February and forecast a reading for the month of 97.6.

The fall in the index’s February reading came as concerns grew in German business about the impact of the strong euro on the nation’s export machine, which has been the major force behind pushing Europe’s biggest economy onto a recovery track.

Indeed, the latest Ifo report is a major blow to the hopes of German Chancellor Gerhard Schroeder’s Social Democrat (SPD)-led government of an economic upswing.

An economic surge would help to both convince voters of the necessity of his unpopular economic reforms and to ease the nation’s current high unemployment.

As it is, economists are expecting growth in the German economy to fall short of two percent in 2004 after chalking up a meagre 0.2 percent growth rate in the final three months of 2003.

Economists are already starting to revise down their first-quarter growth projections for the country.

Only last week the euro appeared to be making its way towards the key USD 1.30 dollars mark by hitting an all-time high of USD 1.2930. The common currency has charged ahead by about 20 percent over the last 12 months.

In recent days, however, the euro has slipped back and was trading Tuesday at USD 1.2569 following the release of the latest Ifo report.

Analysts said that the surprise fall in this month’s reading also reflected uncertainty about the outlook for economic reforms in Germany following Schroeder’s surprise resignation as SPD leader.

The February Ifo report marks the first time that the institute has merged its previously separate readings for western and eastern Germany to produce a new pan-German business confidence index, using 2000 as a base year instead of 1991.

The new pan-German report shows the future business component of the report falling to its lowest level since October, which largely cancelled out a modest rise in the industry leaders’ current business assessment.

While the Ifo report showed business expectations for the coming months dropping to 100.4 from 102.9 reached in January, the index measuring current conditions edged up to 92.6 from January’s 92.5.

“The unfavourable development occurred mainly in wholesaling and manufacturing, where both the business situation and the expectations worsened,” Ifo said.

However, optimism among Germany’s hard-pressed retailers increased, the survey said.

The drop in the Ifo index follows the release earlier this month of another key economic indicator which showed German investor confidence falling for the second month in February.

Compiled by the Mannheim-based Centre for European Economic Research, the so-called ZEW index also posted a much bigger-than- forecast fall in its monthly reading.

Subject: German news