German business confidence drops to new low

25th May 2005, Comments 0 comments

25 May 2005, MUNICH - German business confidence tumbled to its lowest level in nearly two years in May, according to the closely-watched Ifo survey released on Wednesday, dashing hopes of an early pickup in Europe's biggest economy.

25 May 2005

MUNICH - German business confidence tumbled to its lowest level in nearly two years in May, according to the closely-watched Ifo survey released on Wednesday, dashing hopes of an early pickup in Europe's biggest economy.

The Munich-based Ifo economic institute said its monthly survey of 7,000 executives dropped to 92.9 points in May from 93.3 in April with the index having now fallen for four months in a row.

"Unfortunately, an improvement in the economic situation in the coming months is not to be expected," said Ifo chief Hans-Werner Sinn as Germany struggles to remain on a growth path after a protracted period of stagnation.

Economists had forecast a very small rise to 93.5 points in the Ifo index, which gauges business expectations for the coming six months.

Coming in the wake of a raft of downbeat economic data and sentiment surveys, the fall in the Ifo, which is one of Europe's key economic indicators, could set the stage for a new battle over European interest rates.

While European Central Bank chief Jean-Claude Trichet has ruled out cutting rates, the Ifo institute president added his name to those calling on the bank to help underpin growth in the 12-member eurozone by easing monetary policy.

Writing in Germany's WirtschaftsWoche magazine, Sinn said that it was time for the ECB to "give (the eurozone) gas" by lowering rates, which have been at an historic low of two percent for almost two years.

Sinn's remarks follow a call by the Paris-based Organisation for Economic Cooperation and Development for the ECB to cut the cost of money so as to inject new vigour into Europe's economy.

The release of the latest Ifo report came in the wake of Chancellor Gerhard Schroeder's dramatic announcement at the weekend that he planned to bring forward elections, which business and the financial markets believe will break the political stalemate in the country and result in a fresh round of economic reforms.

As a consequence, analysts are expecting the Ifo index to pull back from its current lows as the countdown to the September election gains momentum.

"The announcement of early elections ... will likely boost business sentiment going forward because of the improved prospects for reform," said Elga Bartsch, senior economist with Morgan Stanley.

"Barring other major negative news items in the coming weeks, we might therefore see the Ifo business climate to start rebounding as early as June," she said.

While the survey showed German industry executives' assessment of the current business climate nudged up in May, the index gauging expectations six months down the track unexpectedly fell as concerns have set in about the outlook for the German economy.

Leading the overall business climate index down, the Ifo index measuring future expectations dropped to 92.3 from 93.6. The Ifo component measuring current conditions crept up to 93.4 from 93.1.

Three consecutive monthly falls in the Ifo index is often taken by analysts as a sign of an economic slump. However, the index remains above the 90 points level, which marks out the risk of recession.

While both the euro and oil prices have eased in recent months, the prospects for the German economy have become more uncertain, with growth now almost solely dependent on exports as high unemployment dampens consumer spending and the domestic economy.

Official data released on Tuesday showed the nation's domestic economy shrinking by 0.6 percent in the first quarter of the year. In the meantime, exports jumped by 2.9 percent.

Underscoring the sense of frustration in Germany about the nation's failure to address record jobless numbers and the moves by industry to seek out production sites in low-cost nations, plumbing fixtures maker Grohe Holding GmbH said on Tuesday it was considering slashing its 4,500 German workforce to 3,000 and shifting production out of the country.

After Germany posted a surprise one percent growth rate in the first quarter, the weaker Ifo index is likely to mean a far more downbeat performance during the current quarter, analysts said.

The release of the Ifo report came in the wake of the fall in another key German indicator and the slump in Italian business confidence after Europe's fourth biggest economy plunged into recession in the first three months of the year.

Released on Tuesday, the ZEW German investor survey dropped to a six month-low in May, while the Italian business confidence index, released on Wednesday, plummeted to a three-and-a-half year low.


Subject: German news

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