German Business Confidence Declines

Economists cite concern over volatility in financial markets and soaring euro as factors affecting confidence as German growth shows signs of slowing.

BERLIN (AP) — German business confidence declined for the fourth consecutive month in September, dropping more sharply than expected amid concern over volatility in financial markets, a closely watched survey showed Tuesday.
This month also has seen the euro rise to all-time highs against the U.S. dollar and oil prices at record levels. While the Ifo institute, which released the survey, played down the effect of the soaring euro, economists pointed to that as a factor affecting confidence as German growth shows signs of slowing.
Ifo said its monthly confidence index — a key indicator for the German economy, Europe's biggest — fell to 104.2 points this month from 105.8 the previous month. Economists surveyed by Dow Jones Newswires had expected a smaller decline to 105.0.
''The companies are assessing their current situation less positively than in August,'' Ifo President Hans-Werner Sinn said in a statement.
''Expectations also clouded; initial retarding effects are visible, to which events in the financial markets are likely to have contributed.''
Sinn said managers showed ''only moderate optimism'' over the economic outlook, but appeared relatively relaxed about the impact of the soaring euro, which rose above US$1.40 for the first time last week after the U.S. Federal Reserve slashed a half percentage point off interest rates.
''For the future exporting business no strong effects are feared despite the high euro exchange rate,'' he said. ''Hiring will continue, although it is expected to slow, according to the survey participants.''
A subindex measuring executives' outlook for the next six months slipped to 98.7 points from 100.4; while their assessment of the current business situation dropped to 109.9 from 111.4.
The monthly index from Munich-based Ifo is based on a survey of some 7,000 managers. It found the climate worsening in the retail, manufacturing and construction sectors, but improving among wholesalers.
Helped by strong exports, Germany has been emerging over the past two years from a lengthy period of economic stagnation that pushed up unemployment and prompted Germans to tighten their purse strings.
Recently, however, several indicators for the nation's economy have been sliding, among them surveys of investor and consumer confidence. The U.S. subprime lending crisis has rippled through markets in Europe and elsewhere.
''Without a doubt, the mixture of high uncertainty about the fallout of the subprime crisis on the real economy and the new record highs in the oil price as well as the euro-dollar (exchange rate) ... dampened the solid business outlook of firms,'' Alexander Koch, an economist at UniCredit in Munich, wrote in a research note.
He said the result ''underscores that the peak in the business dynamic has already clearly been passed.''
Holger Schmieding, Bank of America's chief European economist, said that ''the German economy is heading for a significant slowdown this autumn and winter.''
''As the manufacturing sector is gradually losing momentum, the recent spike in oil and food prices as well as the uncertainty caused by the current financial market upheaval seems to be retarding the long-awaited revival in private consumption,'' he said.
However, Schmieding said there were good prospects of growth rebounding from next spring.
As for the euro, he said that its rise ''still seems to be manageable for major parts of the German industry,'' with strong demand from eastern Europe, Asia and elsewhere mitigating the impact on U.S. demand.
Still, he added that uncertainty over market volatility and ''the risk of further currency gyrations'' likely would cause some businesses to postpone investment decisions over the coming months.
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