Eurozone debt crisis hits German business confidence

Prospects for the German economy, the eurozone's biggest, are clouding over, with the debt crisis and financial market turmoil hurting business confidence, data showed on Monday. The closely-watched Ifo business climate index fell to its lowest level in more than a year this month, as companies become increasingly pessimistic about the outlook for the coming six months. The index, calculated each month by the leading think-tank Ifo in Munich, fell to 107.5 points in September from 108.7 points in August, its lowest level since June 2010. Economists had been pencilling in an even steeper decline but a breakdown of the data does not appear to bode well for the German economy later this year and into 2012, analysts said. A sub-index that measures company assessments of their current situation slipped only fractionally to 117.9 points from 118.1 points. But expectations for the six months to come dropped to 98 points from 100 points, hitting the lowest level since July 2009. Ifo chief Hans-Werner Sinn said the "continuing favourable situation of companies shows that the German economy has so far managed to decouple from political turbulence." But analysts were not so sure. September's modest decline in the German Ifo is a relief after larger falls in other survey indicators but it remains clear that German economic activity is slowing very sharply," said Jennifer McKeown, senior European economist at Capital Economics. Carsten Brzeski, senior economist at ING Belgium, agreed. "Recent financial market turmoil and the never-ending eurozone sovereign debt crisis have befogged the outlook for the German economy," he said. "The risks for the German economy have increased lately and today's drop in the Ifo expectation component is a serious warning." Current business activity was still running at very high levels and Christian Schulz, senior economist at Berenberg Bank, said the third quarter "could still see German GDP (gross domestic product) expanding at a healthy pace." Nevertheless, the economic clock "now points to the beginning of a downturn" and he sees Germany "falling into a mild recession towards the end of the year." McKeown at Capital Economics agreed. "We still think that the eurozone's locomotive has stalled and see German GDP growth slowing from about 3.0 percent this year as a whole to just 0.5 percent in 2012," she said. Berenberg Bank's Schulz said the fundamentals for the German economy "remain positive -- the labour market is in very good shape and public finances largely in order. German companies are reaping the benefits of years spent improving competitiveness." However, the German economy was still very export-dependent and therefore more exposed to cyclical swings of the world economy than, say, France. So, "with waning confidence cooling the economy, German is likely to head for a mild recession in the fourth quarter of 2011 and first quarter of 2012," the analyst predicted. UniCredit economist Alexander Koch similiarly believed that a "strong correction in global and German leading indicators signal at least much weaker performance towards year-end." Indeed, with no bottoming out in business sentiment yet discernible, "downward pressure will possibly still increase further -- not least due to the unchanged smoldering sovereign debt crisis," Koch said.