Germany - recession

Bad news for German economy

Tuesday 26 August 2008

Germany's business climate index has dropped to a three-year low according to an economic research institute. Consumer confidence is also down, reinforcing the recession threat to Europe's most important economy.

German economic prospects took two big hits on Tuesday, raising fears of recession as both business sentiment and consumer confidence were reported to be falling further in Europe's biggest economy.

The monthly business climate index calculated by the Munich-based economic research institute Ifo fell to 94.8 points from 97.5 points in July, its lowest level since August 2005.

Economists polled by Dow Jones Newswires had forecast a much more modest drop to 97.1 points.

Household confidence as measured by the GfK institute fell to a five-year low meanwhile, as "subdued economic prospects and the expectation of additional price hikes continued to depress consumer sentiment."

The drop in Ifo's business climate survey was the third in a row, and a statement quoted president Hans-Werner Sinn as saying that "the German economy is encountering an increasingly more difficult situation."

A sub-index that measures the current situation fell to 103.2 points from 105.6 in July, while expectations for the coming six months dropped to 87.0 points from 89.9 points, Ifo said.

The climate was cooler in the manufacturing, business and service sectors.

In manufacturing, survey participants "are markedly more sceptical with regard to the six-month outlook," Ifo said.

They forecast weaker support from exports and expected to observe "more caution in hiring additional staff."

Germany has benefitted from falling unemployment, but the trend has begun to slow, and consumer confidence has also fallen further, the separate survey by GfK showed earlier on Tuesday.

The nation's economy contracted by 0.5 percent in the second quarter of 2008, and economists are increasingly pointing to the possibility it could fall into recession, as defined by two consecutive quarters of falling output.

The only bright spot in Ifo's survey was the business climate in wholesaling, where the current situation was seen again "as slightly positive and the outlook is assessed less critically."

But consumers surveyed by GfK were reportedly concerned by falling indicators, including previous Ifo polls, and "negative headlines regarding the still ongoing financial crisis."

At UniCredit Markets, Andreas Rees said: "One thing has become crystal clear. The German consumer is no match for the rapid slowdown of the global economy."

In addition, GfK said that "consumers are not interpreting the marked decrease in crude oil prices as an all-clear signal when it comes to purchasing power," as they face higher gas prices in the coming months according to recent announcements.

At Capital Economics, economist Jennifer McKeown commented on the continued decline in the Ifo index by saying that "the turnaround in the index lately is a worrying sign that the economy is slowing fast."

Rees underscored that the Ifo expectations component had posted its twelfth decline in the last 15 months and was now at its lowest level since February 1993.

UniCredit Markets put the probability of Germany sliding into technical recession at "a high 70 percent."