German business confidence deteriorated for the fourth month in a row in October, data showed yesterday, as Europe’s economic powerhouse begins to feel the pain of the region’s debt crisis.
The monthly Ifo business climate index fell by one full point to 106.4 points in October, its lowest level in just over a year.
The decline may not have been quite as steep as expected – economists had been pencilling in a drop to 106.3 or 106.2 points – but the data showed that the eurozone’s debt crisis is making companies perceptibly nervous about the future, analysts said.
Ifo chief chief Hans-Werner Sinn said the business climate in Germany “cooled further in October”.
While survey participants assessed their current business situation “predominantly as favourable, they do not regard it quite as positively as they did in September,” Mr Sinn said.
And business expectations for the next six months “are noticeably more pessimistic than previously,” he said.
Nevertheless, “given the international turmoil, the German economy is still performing well” overall, he insisted.
A sub-index that measures company assessments of their current situation fell to 116.7 points from 117.9 points in September and expectations for the six months to come dropped to 97.0 points from 97.9 points, hitting its lowest level since July 2009.
Storm clouds have been gathering over Europe’s biggest economy for a while now.
On Thursday, the government nearly halved its growth forecast for next year on concern the eurozone’s deep debt crisis will hurt exports, traditionally the motor of the German economy.
And there appears to be no way out of the crisis any time soon: Rifts between Berlin and Paris are delaying efforts to stem global fallout. A lasting gameplan had been expected at a summit in Brussels tomorrow, but suddenly a fresh summit has been called for Wednesday.
Holger Schmieding, economist at Berenberg Bank, suggested that hopes for a solution in Brussels this weekend “may have dampened the October decline in business confidence somewhat”.
Nevertheless, “it is still the fourth significant fall in the Ifo index in a row” and the speed of the decline was “alarming and points to a modest recession ahead,” Mr Schmieding said.
The economist believed the eurozone’s economic fundamentals “remain solid” and Germany had already undertaken successful economic reforms in recent years.
However, it was paramount that EU leaders find a solution that will calm markets permanently, otherwise “the eurozone is likely to slip ever deeper into recession”, he said.
Commerzbank chief economist Joerg Kraemer similarly believed the only way to avoid recession would be for European politicians to “agree – against our expectations – on a clear concept for solving the sovereign debt crisis”.
Ben May, European economist at Capital Economics in London, said that while the modest decline in the Ifo index superficially suggested that the German economy was continuing to hold up reasonably well, “in all, there is nothing to alter our view that Germany is in the midst of a sharp slowdown and that growth next year will ease to a well below consensus 0.5 per cent or so,” he said.
ING Belgium economist Carsten Brzeski, too, said that the eurozone’s “economic Superman (had) looked invulnerable” for a long time.
But now “with Italy and France starting to falter, Germany is now finally feeling the pain of the sovereign debt crisis”, he said.
Andreas Rees, chief German economist at UniCredit, was less pessimistic.
“There is no denying that the German economy will cool off in coming quarters. However, doomsday is certainly not around the corner,” he said.
Companies had an “airbag” of a huge pile of backlog orders which would be worked off in coming months.
Furthermore, investment activity remained high and that would help offset, at least in part, any decline in exports, Mr Rees argued.