Slide in German business morale points to weak third quarter

German business sentiment fell for a fifth straight month in September to its lowest level in nearly 18 months, dampening expectations for a third-quarter rebound in Europe’s largest economy.

The Munich-based Ifo think tank’s business climate index, based on a monthly survey of some 7,000 firms, fell to 104.7 from 106.3. “The German economy is no longer running smoothly,” Ifo said.

The survey showed sentiment worsening across all sectors of the economy. The German economy steamed ahead at the start of the year thanks to an unusually mild winter that boosted construction activity.

But it contracted by 0.2 per cent in the second quarter, leading some to warn of the risk of recession. The crisis in Ukraine and a faltering European economic recovery are seen as the main factors behind the weakness. Ifo economist Klaus Wohlrabe told Reuters after the release of the index that he now expects zero growth in Germany in the third quarter. For the full year, he said gross domestic product (GDP) was likely to expand by around 1.5 per cent.

"The euro zone's biggest economy has reached a dangerous stage between soft spell and longer-lasting almost-stagnation," said Carsten Brzeski, chief economist at ING. While hard data has suggested the economy remains robust, sentiment indicators have been more gloomy for a while.

Earlier this week, the German Bundesbank predicted a positive end to the year despite the recent slowdown. The government is forecasting growth of 1.8 per cent this year, although Berlin has hinted it may just miss that forecast.

Some observers, including industry lobby BDI and the Paris-based Organisation for Economic Cooperation and Development (OECD) have cut their forecasts for the year following the weak second quarter.

BDI has cut its forecast to 1.5 per cent growth from 2.0 per cent, saying that crises in Ukraine, Iraq and the Middle East as well as some government policies were creating uncertainty for companies.

Wohlrabe, too, said the Ukraine crisis and a flagging European economy, were causing uncertainty for German companies.

Germany has extensive business ties with Russia, with more than 6,000 German firms active there. About 10 percent of German exporters send goods to Russia and some of those are concerned that the standoff between Moscow and the West over Ukraine will hurt their business.

German consumer goods group Henkel has forecast a tough six months ahead not least due to political turmoil in Russia, its fourth-largest market. And earlier this month, Opel, the European arm of General Motors, said it would cut production and shedding around 500 jobs in Russia amid a plunge in local demand.

Reuters