Good times could be past for German economy

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Poor performance in Germany and the eurozone generally have triggered a lack of confidence in the German economy amid growing inflation pressures

Berlin -- Heightened concerns about the growing threat of inflation combined with stagnating economic growth have triggered a sharp slump in German economic confidence.

While a survey released Tuesday said German consumer confidence dropped to a two-year low, the closely watched Ifo index showed business confidence in Europe's biggest economy cascading down to a two-and-half year low in June.

"Rising fears of inflation, combined with the sustained crisis in the financial markets, a strong euro and a weaker global economy mean that consumers are not very upbeat in their assessments of future economic growth," the GfK marketing research group said releasing its latest consumer confidence survey.

The Nuremberg-based GfK said its forward-looking index slumped to 3.9 points in July from a downwardly revised 4.7 points in June as surging energy and food prices helped to stoke concerns among the nation's households.

Analysts had predicted that the survey of about 2,000 consumers would slip to 4.6 points from the original 4.9 points projected by the GfK.

Based on a survey of 7,000 German executives, the Ifo business confidence index fell to 101.3 points this month from 103.5 points in May as the mood darkened in the boardrooms of Europe's biggest economy.

Economists had forecast that the monthly index drawn up by the Munich-based Ifo economic institute would slip to 102.3 points with both the business and consumer surveys highlighting pressure facing the European Central Bank as it moves to tackle inflation when growth is losing momentum.

"The firms have assessed their current business situation clearly less favourably than in the previous month, and they are more sceptical regarding the six-month outlook," said Ifo chief Hans- Werner Sinn releasing the survey.

"The sharp hike in oil prices is evidently becoming an increasing burden on the German economy," Sinn said.

Both surveys could also set the stage for the release this week of a series of major economic sentiment surveys, which are likely to point to a bleaker outlook taking shape across Europe.

Business confidence in Belgium, which is seen by economists as a key barometer of the economic mood in the 15-member eurozone, fell sharply in June to minus 5.9 from minus 1.9 in May, the country's national bank said Monday.

Economists had predicted a decline to minus 2.5 with a drop in confidence in Belgian's manufacturing sector helping to drag down the overall indicator.

Likewise, the Ifo survey showed the mood in Germany's key manufacturing sector also worsened significantly this month.

Moreover, inflation fears and the growing pessimism among German consumers resulted in the GfK institute also revising down its previous 2008 forecast for private consumption in Germany from a real 1 per cent to 0.5 per cent.

The institute already cut its consumer spending forecast in March from 1.5 per cent to 1 per cent.

Reflecting the deepening sense of economic uncertainty, the GfK said both economic and income expectations dropped for the second time in a row with the propensity to spend also falling.

"Repeated announcements about new record petrol and diesel prices have compounded consumer fears of a loss of purchasing power," the GfK said.

However, powered by strong demand from the world's leading emerging economic nations in Asia, Eastern Europe and the Middle East, Germany's still-positive export outlook has helped to result in economists revising up their 2008 German growth outlooks.

Instead of a previously projected 1.9 per cent, Germany's central bank the Bundesbank now expects the country to clock up a 2.25 per cent growth rate this year. The German economy grew by 2.5 per cent in 2007.

But German growth is likely to loose ground in the run-up to the end of the year with the nation's expansion rate tipped to slow in 2009.

The latest eurozone economic sentiment surveys also come as part of the buildup to next week's ECB meeting with bank chief Jean-Claude Trichet having placed investors on notice that the Frankfurt-based bank was likely to hike rates by 25-basis points to ward off inflationary pressures.

Data to be released on Thursday is forecast to show German inflation creeping up to 3.2 per cent in June, as a result increasing the chances of the ECB delivering its first rate hike in more than a year at its next meeting, set down for July 3. DPA

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