Gloom deepens over Germany as confidence slumps

Eurozone gloom deepened on Friday with data showing that the debt crisis has pushed business confidence in Germany, Europe's biggest economy, to the lowest level for more than two years. Compounding an unexpectedly sharp drop in investor sentiment earlier this week, the Ifo economic institute's closely watched business climate index fell to 105.3 points in June from 106.9 points in May. It is the second month in a row that the index has fallen and brings the barometer to its lowest level since March 2010. "The recent surge in uncertainty in the eurozone is impacting the German economy," said Ifo president Hans-Werner Sinn. "While companies' assessments of their current business situation brightened slightly, they scaled back sharply their expectations for the next six months," Sinn said. Ifo calculates its headline index on the basis of companies' assessments of their current business and the outlook for the next six months, with 100 being the long-term average. And while the sub-index measuring current business edged up to 113.9 points in June from 113.2 points in May, the outlook sub-index tumbled to 97.3 points from 100.8 points, its lowest level since October 2011. The decline in the Ifo index this month was slightly steeper than expected. Berenberg Bank economist Christian Schulz said a breakdown of the data painted a mixed picture across the different sectors. Manufacturing was hit by a deterioration of the export outlook, "a clear indication that companies feel the impact of the euro crisis elsewhere," he said. By contrast, the most domestically-oriented sectors -- retail and construction -- reported a slight improvement in the business climate. "The key for the economic outlook is the management of the euro crisis," Schulz said. "Based on very sound economic fundamentals, the German economy can start expanding at trend growth rates again once this wave of the euro crisis is brought under control. Next week's EU summit and the subsequent ECB meeting on July 5 stand a decent chance of achieving that," the analyst argued. If EU leaders in Brussels make progress on a banking union and growth initiatives, "the ECB will probably complement that by following other central banks across the world in cutting rates and providing more liquidity to the banking system," he said. ING Belgium economist Carsten Brzeski said "German businesses have finally got the crisis feeling." The German economy "is clearly slowing down and a contraction of the economy in the second quarter looks possible," the analyst warned. While the "German ship is more solid than all other eurozone ships, latest indicators have been good reminders that even the most solid ship can capsize in a rough thunderstorm," he said. Capital Economics economist Jonathan Loynes said that, coming after the steep drop in the ZEW investor confidence survey earlier this week, the Ifo data "reinforce the message... that the eurozone's growth engine has stalled." While the index remained well above the lows seen back in 2008 and 2009, the survey suggests "that the German economy is doing little more than stagnating at the moment, and may even be contracting," Loynes said. In short, it was "another blow to hopes that strong growth and higher inflation in Germany would help to solve the eurozone crisis," the analyst concluded. Natixis economist Constantin Wirschke similarly saw the Ifo data as an indication that "Germany cannot decouple from the eurozone crisis."