Oct. 27 (Bloomberg) -- German business confidence declined to the lowest level in more than five years in October as the deepening financial crisis dimmed the outlook for economic growth.

The Munich-based Ifo institute said its business climate index, based on a survey of 7,000 executives, fell to 90.2, the weakest reading since May 2003, from 92.9 in September. A gauge of business expectations slumped to 81.4, the lowest since the index for reunified Germany started in January 1991.

The German economy is struggling to recover from a second- quarter contraction after the global financial crisis froze credit markets, sapped consumer spending and damped demand for European exports. Stocks continued to tumble around the world today on concern an economic slump will damage company earnings.

``The financial crisis is developing into a full economic crisis,'' said Juergen Michels, a Citigroup Inc. economist in London. ``We'll slide not only into stagnation but into recession. The outlook is bleak.''

The euro fell half a cent after the Ifo report was released to $1.2335, the lowest in more than two years.

Economists expected the Ifo index to drop to 91, the median of 23 forecasts in a Bloomberg News survey showed. The bigger- than-forecast decline was driven by the plunge in business expectations, with a measure of current conditions rising to 99.9 from 99.8.

Germany's leading economic institutes this month slashed their joint forecast for growth in Europe's biggest economy next year to just 0.2 percent.

ECB Rates

Investors are betting the European Central Bank will follow its emergency interest-rate cut on Oct. 8 with another half-point reduction on Nov. 6, Eonia forward contracts show. The ECB's benchmark lending rate currently stands at 3.75 percent. ECB President Jean-Claude Trichet may comment on the bank's intentions when he speaks at an event in Madrid at 2:55 p.m. today.

The euro has dropped 16 percent against the dollar in the past month as Europe's economic outlook deteriorates and the likelihood of further rate reductions increases.

While a weaker currency makes exports more competitive, ``it doesn't help if global demand crashes at the same time,'' said Stefan Muetze, an economist at Helaba Invest GmbH in Frankfurt.

Exports from Germany unexpectedly fell for a second month in August and investor confidence dropped for the first time in three months in October, to near a record low.

Earnings Hurt

Daimler AG, the world's second-biggest maker of luxury cars, last week cut its forecast for full-year earnings by 1 billion euros ($1.3 billion) as the worldwide credit crisis restricts consumers' access to loans. Rheinmetall AG, a German maker of car parts and military equipment, lowered its 2008 earnings outlook on Oct. 23 because of a drop in car-component orders.

Germany's benchmark DAX share index has dropped 49 percent this year.

Financial institutions worldwide have reported more than $660 billion in losses and writedowns since the U.S. housing slump triggered the credit crisis last year. Lending between commercial banks ran dry after Lehman Brothers Holdings Inc. filed for bankruptcy on Sept. 15, sending borrowing costs to records as confidence waned.

The German parliament on Oct. 17 approved the government's rescue plan for the country's financial institutions. The package pledges 400 billion euros in loan guarantees, provides as much as 80 billion euros to recapitalize banks in distress, and sets aside 20 billion euros to cover potential losses from loans.

The ``dramatic worsening of the financial crisis since the collapse of Lehman Brothers radically modified the outlook for growth'' and ``our assessment of risks to price stability as well,'' ECB council member Guy Quaden said last week.

To contact the reporter on this story: Christian Vits in Frankfurt at cvits@bloomberg.net

Last Updated: October 27, 2008 06:39 EDT