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German Recovery Hopes Damped After Business Confidence Weakens Further

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German business confidence eroded to the lowest level in over four years in May amid rising concerns over global trade tensions, thus shrugging off the positive impact of the modest economic growth in the first quarter, and damping hopes of a recovery in the biggest euro area economy in the near term.

Business confidence weakened for a second straight month, and at a faster-than-expected pace in May, to its lowest level since November 2014, survey results from the Ifo Institute showed Thursday.

The Ifo business confidence index fell to 97.9 from 99.2 in April. Economists had forecast a score of 99.1.

The current assessment index eased sharply to 100.6 from a revised 103.4 in April. Economists had forecast a reading of 103.5.

The expectations measure of the survey was steady at 95.3 in May, after April's score was revised from 95.2. Economists had predicted a fall to 95.

"The German economy is still lacking in momentum," Ifo Institute President Clemens Fuest said.

Earlier this week, Bundesbank said in its monthly report that the German economy is set to lose momentum in the second quarter, adding that the first quarter growth was largely driven by one-off factors.

The bank expects the downturn in the industry to continue and intensify.

Confidence weakened slightly in manufacturing and fell sharply in services, the Ifo survey showed. Morale eroded in the trade sector too, led by wholesale.

In contrast, the business climate improved for a third month in a row in construction, building on the already very positive assessment of the current situation and a modest return of optimism.

Elsewhere on Thursday, survey data from IHS Markit showed that the German private sector expanded at a moderate pace in May.

The composite output index of the Purchasing Managers' survey rose unexpectedly to a three-month high of 52.4 in May, exceeding the expected 52.0. A reading above 50 indicates expansion in the sector.

Data showed that other indicators weakened, however, with new orders falling for the fourth time in five months and employment growth easing to its lowest in just over three years in April.

The manufacturing PMI fell unexpectedly to 44.3 from 44.4 in April. The expected score was 44.8. The services PMI dropped to a 4-month low of 55.0 from 55.7 in the previous month. The reading was forecast to fall moderately to 55.4.

Meanwhile, Germany's economy expanded as initially estimated in the first quarter, mainly driven by private consumption that rose at the fastest clip in nearly eight years.

Gross domestic product advanced 0.4 percent sequentially in the first quarter, after staying flat in the fourth quarter and contracting 0.2 percent in the third quarter of 2018, figures from Destatis showed.

Private consumption advanced 1.2 percent, the fastest gain since 2011, while government spending decreased 0.3 percent.

Gross fixed capital formation growth improved to 1.1 percent from 0.8 percent. Investment in construction surged 1.9 percent. Exports and imports climbed 1 percent and 0.7 percent, respectively.

On a yearly basis, GDP climbed working-day adjusted 0.7 percent, which was slightly faster than the 0.6 percent expansion seen in the fourth quarter.

Both the quarterly and annual growth rates matched their initial estimates released on May 15.

"Potential political uncertainty in the Eurozone after the European elections, the escalating trade conflict between the US and China and higher oil prices are clear headwinds for the economy in the months ahead," ING economist Carsten Brzeski said.

"A lot will depend on whether or not domestic demand can again weather these external risks."

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