Confidence among German businesses fell more than expected in May to the lowest level in six months, as talks about a possible Greek exit from Eurozone weighed on firms' optimism, a key survey revealed Thursday.
The Ifo Institute said that its business climate index fell to 106.9 in May from 109.9 in April. This was the first drop in the index since October last year. Economists had forecast a more modest drop to 109.4.
Increasing uncertainty in the Eurozone is impacting the German economy, Ifo said in the survey report.
The threat of Greece leaving the euro intensified after this month's inconclusive elections. Re-elections will be held by mid June. Fear is that if the Greeks vote for the far-left Syriza party, which opposes the international bailout terms, the euro member will not get any more financial aid from other Eurozone countries. This would ultimately result in Greek defaulting on its debt and subsequently leaving the Eurozone.
"Today's Ifo index shows that German businesses have finally lost their optimism," said Carsten Brzeski, senior economist at ING Bank NV.
With austerity-driven slowdowns coming to most other core Eurozone countries, an obvious cooling of the Chinese economy and a still not very dynamic US recovery, export growth should clearly come down, Brzeski said. "Moreover, hopes for more domestic consumption on the back of higher wage could easily be disappointed when exporters see market shares dropping."
Assessments of the current business situation also deteriorated. The current conditions index fell to 113.3 in May from 117.5 in April. This was expected to fall to 117.1. A lower reading was reported in July 2010, when the index was at 111.8.
Companies also expressed greater pessimism about their business outlook. The expectations index remained 1.8 percentage point below the previous month's level at 100.9.
The business climate index for the manufacturing sector dropped sharply, primarily due to much poorer assessments of the current business situation. Business climate fell significantly in retailing as assessments of the current conditions slumped while majority of expectations remained pessimistic.
In wholesaling, the downturn wasn't as worse as the retail sector. The business climate indicator for the construction sector also dropped.
The Wiesbaden-based Federal Statistical Office confirmed today that the economy bounced back, growing 0.5 percent quarter-on-quarter in the first quarter after a 0.2 percent contraction in the fourth quarter.
The Organization for Economic Co-operation and Development expects Germany to grow 1.2 percent in 2012 and 2 percent next year. In its latest economic outlook report, the OECD said activity will pick up further as confidence improves and domestic demand strengthens.
Strong labor market performance, low deleveraging needs and favorable financing conditions will contribute to the rebound in private consumption and investment, the think-tank added.
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