Gloom deepens over Germany as business confidence falls

The economic skies above Germany darkened Wednesday when business confidence slumped to a two-and-a-half-year low. But top companies such as carmaker VW and software giant SAP rose above the gloom and confirmed or even upped their profit targets for the whole year. "The clouds over the German economy are darkening," said the head of the Ifo economic think tank, Hans-Werner Sinn, after the institute's widely-watched business confidence index fell for the sixth month in a row to the lowest level since February 2010. "Companies again expressed growing dissatisfaction with their current business situation," Sinn said. That was not the case, however, for Volkswagen, Europe's biggest carmaker, which notched up a 60-percent increase in third-quarter net profit and confirmed its forecasts for the whole year. "The Volkswagen Group maintained its positive trajectory in the first nine months of 2012 despite difficult conditions," said VW's chief executive Martin Winterkorn. "Although the times aren't easy... we remain committed to our ambitious goals for 2012, despite growing headwinds," he said. German software giant SAP, too, said it was "pleased" with its overall performance in the third quarter, when it notched up double-digit software and software related service revenue growth for the 11th consecutive quarter. And finance chief Werner Brandt insisted the software maker remained "confident in our full-year outlook." VW and SAP effectively rang in the autumn season of quarterly earnings reports for Germany's biggest companies and it remains to be seen whether the other companies that make up the blue-chip DAX index are equally confident. Sportswear maker Puma, which is on the Frankfurt stock exchange's mid-cap MDAX index, complained that heavy restructuring costs sliced 85 percent off its third-quarter profits. The drop in the Ifo was unexpected, with analysts surveyed by Dow Jones Newswires expecting a small rise in the index, which is calculated on the basis of companies' assessments of their current business and the outlook for the next six months. The sub-index measuring current business dropped to 107.3 in October, its lowest level since June 2010, and the outlook sub-index was unchanged at 93.2 points. Unlike many of its neighbours, Germany has shown strong resistance to the debt crisis that has swept through the 17-country bloc, relying on its powerful export motor to keep the economy humming. It notched up modest growth of 0.3 percent in the second quarter while the eurozone as a whole contracted by 0.2 percent. But even the German powerhouse has been unable to resist forever and a raft of economic data recently has suggested the economy is beginning to falter. Looking at the wider eurozone as a whole, the picture certainly looks gloomy. The Composite Purchasing Managers Index (PMI), a survey of 5,000 eurozone businesses compiled by the Markit research firm, fell to 45.8 points in October from 46.1 in September. The index is a leading indicator and any reading below 50 indicates a contraction in activity, with the eurozone getting off to a bad start for the fourth quarter as the debt crisis continues to undermine growth and jobs. "The eurozone recession is still getting worse," said Berenberg Bank chief economist Holger Schmieding. "The further declines in German Ifo business climate and the eurozone manufacturing PMI for October suggest that the euro economy is contracting at a slightly faster rate in the fourth quarter than in the third quarter," the expert said. Capital Economics analyst Ben May agreed. "October’s eurozone PMI and German Ifo surveys continued to paint a pretty dismal picture of growth prospects in the region as a whole and confirmed that Germany is also suffering," he said. But Commerzbank chief economist Joerg Kraemer said the ECB's recent anti-crisis measures "lowers the risk of the monetary union breaking up and the much too low interest rates for Germany should boost the economy in the medium term." UniCredit analyst Andreas Rees also said he viewed Germany's economic glass as being more half full than half empty. "We think that the chances of a renewed -- and at least moderate -- pick-up in optimism in the next few months are pretty high," he said. In the wake of the ECB's latest bond purchase programme, "psychological fears of a eurozone breakup among companies and financial investors substantially subsided," he said.