German business confidence plunges

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German business confidence tumbled this month at the fastest rate since the aftermath of Lehman Brothers’ collapse, as the country felt the impact of financial market turmoil and fears about the global growth outlook.

The Munich-based Ifo institute said its “business climate” index dropped more than expected, from 112.9 in July to 108.7 in August, the lowest level since June last year. The monthly fall was the biggest since November 2008, when economic confidence was plummeting globally in the wake of the Lehman investment bank failure.

German businesses were markedly gloomier this month about prospects for the next 12 months, but the Ifo survey showed them also revising down their assessment of current business conditions.

The increased pessimism almost certainly reflected worries about the US economic outlook and global trade prospects – as well as escalation of the eurozone crisis. “The German economy cannot decouple from the worldwide turbulence,” said Hans Werner-Sinn, Ifo’s president.

Economists still argue that Germany can avoid a dip back into recession, however. Although the Ifo index has fallen sharply for two consecutive months, it remains high by historical standards – especially the component of the index gauging businesses’ assessment of current conditions.

Dirk Schumacher, economist at Goldman Sachs in Frankfurt, said that so far business surveys had been “more consistent with a slowdown scenario for the German economy than stagnation or an outright recession”.

Until March this year, the Ifo index had risen steadily and acted as a early indicator of the fast pace of expansion seen in Germany’s economy in the first three months of this year, powered by exports and investment but also by consumer spending. The index remained at historic highs until mid-year, even as the eurozone debt crisis escalated. But growth data last week showed an unexpectedly sharp slowdown in the second quarter, when gross domestic product expanded by just 0.1 per cent compared with the previous three months. Given its track record as an indicator of future growth, the latest Ifo fall appeared to rule out any significant early rebound.

Across the eurozone, consumer confidence has fallen this month at the fastest rate in two decades, while purchasing managers’ indices this week suggested growth across the 17-country region would remain at near-stagnation levels. Adding to the gloom, new eurozone industrial orders fell by 0.7 per cent in June compared with May, according to Eurostat, the European Union’s statistical office. Although May had seen a 3.6 per cent surge in orders, June’s fall hinted a slower production growth in months to come.

This week, Germany’s Bundesbank expressed confidence that Germany’s economy would continue to grow in the second half of 2011 – but “somewhat more slowly” than before. Nevertheless, it foresaw a “range of global risk factors” – including worries about the US economy, a slowdown in emerging markets, and financial market nervousness.

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