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German Business Confidence Weakens Unexpectedly

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German business sentiment deteriorated unexpectedly at the start of the year, reflecting companies' more pessimistic outlook for months ahead.

The business climate index dropped to 95.9 in January from 96.3 a month ago, survey data from the ifo institute showed Monday. The reading was expected to rise to 97.0.

The German economy is starting the year in a cautious mood, ifo President Clemens Fuest said.

Today's Ifo index is a painful warning against premature optimism, Carsten Brzeski, an ING economist said.

The German economy is in a phase of bottoming out, which could come just in time to avoid more negative spillover effects from the manufacturing weakness to the labor market, Brzeski added.

Andrew Kenningham, an economist at Capital Economics, said it is clear that the German manufacturing recession is easing, but has not yet ended, and that overall economic conditions remain weak.

The International Monetary Fund last week downgraded Germany's growth projection for 2020, citing sluggishness in manufacturing. The lender forecast the economy to grow 1.1 percent this year and 1.4 percent in 2021.

According to the ifo, the assessment of current situation strengthened, but firms' expectations deteriorated in January.

The current conditions index improved to 99.1 from 98.7 in the previous month and was slightly above the forecast of 99.0.

Meanwhile, the expectations indicator fell to 92.9 from 93.9 in December, while it was expected to rise to 94.5.

In the manufacturing sector, the business climate advanced markedly. Current assessment improved the most since February 2017 and companies were less pessimistic regarding the coming months.

In the service sector, the indicator declined considerably in January, due to restrained expectations. The business climate in trade climbed in January on improving current situation and expectations.

In construction, the business climate fell back as firms' assessments of the current conditions slid to the lowest since June 2018 and they were more skeptical about coming months.

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