Business confidence dropsfuelling recovery worries

26 March 2004

MUNICH – Germany’s key business confidence slumped to a five-month low in March, a key survey of 7,000 executives released Friday showed, raising fresh doubts about the current global economic upswing and fuelling talk of a European rate cut.

Drawn up by the influential Munich–based Ifo economic institute, the Ifo index recorded its second monthly fall in March dropping to 95.4 points from 96.4 points in February. The fall in the March reading was bigger than what economists had feared with the consensus forecast for a decline to 95.7 points.

One of Europe’s prime economic indicators, the index stood at 97.5 points in January with the Ifo institute chief Hans-Werner Sinn ruling out any significant impact on the March survey from this month’s terrorists’ bombing in March.

“The worries about the further development of the economy have become stronger,” said Sinn who called on the European Central Bank to help shore economic confidence by cutting borrowing costs.

Speaking on CBNC television, Sinn said: “I strongly recommend cutting rates now.”‘

Of particular concern, said Sinn in a statement accompanying the release of the March report, was that for the first time in six months, German firms viewed their current prospects more negatively, with this index reading falling to 92.1 points in March, from 92.6 points in February.

At the same time, the index reading for German firms’ future prospects also fell, from 100.3 points in February to 98.9 points in March, said the institut, which is now expecting to lower its growth forecast for Europe’s biggest economy.

Economics and Labour Minister Wolfgang Clement insisted this week that Berlin was sticking to its 2004 growth forecast of between 1.5 percent and 2 percent.

But marking out the changing economic mood in Germany, 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 the nation out of three years of economic stagnation.

The slide in the index comes ahead of next Thursday’s meeting of the European Central Bank’s 18-head rate-setting council and adds to worries that the long-awaited global upturn could be running out of steam.

While most economists expect the ECB to hold rates at their historic low of two per cent for most of the year, some are reluctant to rule out a rate cut as early as next week with low inflation helping the bank to move to keep the 12-member eurozone on a growth track by reducing borrowing costs.

ECB chief Jean-Claude Trichet said in a newspaper interview this week that the bank may have to cut its economic growth forecasts if consumer demand fails to pick up, adding to speculation that the bank might be soon forced to ease monetary policy.

But according to Joachim Fels, European economist with the US investment house Morgan Stanley, the drop in the Ifo confirms that the economic recovery in Germany, while on-going, remains fragile.

Analysts the March Ifo survey was also held against the backdrop of higher oil prices, weaker-than-expected US data, volatile equity prices and on-going concerns about the impact on foreign orders of the strong euro.

With renewed talk of a rate cut, the euro fell by 0.49 percent to 1.2187 dollars following the publication of the Ifo March report.

The publication of the latest Ifo report, however, came in the wake of reports showing an unexpected rise in business confidence in both Belgium and Italy.

But a string of weak European consumer sentiment surveys released in the run-up to the Ifo report have added to concerns that the economic upturn, which was initially powered ahead by exports, might be losing speed before a pick up in private consumption has emerged to underpin economic growth.

“Consumer confidence today is not necessarily at a level that would be justified by economic fundamentals,” Trichet said in his comments to Germany’s business daily, Handelsblatt.

DPA

Subject: German news