German Business Confidence Drops to 16-Month Low as EU Tackles Debt Crisis

German business confidence fell to a 16-month low in October as the euro region’s worsening debt crisis threatened to push the economy into recession.

The Munich-based Ifo institute’s business climate index, based on a survey of 7,000 executives, dropped to 106.4, the lowest since June 2010, from 107.4 in September. Economists expected a decline to 106.2, according to the median forecast of 42 economists in a Bloomberg News survey.

European leaders, due to meet in Brussels on Oct. 23, are under pressure to find a solution to the turmoil that has pushed Greece to the brink of default and is now threatening banks across the 17-nation euro area. German investor confidence slumped to a three-year low this month and the benchmark DAX share index has dropped 21 percent over the past three months, reflecting concern that company earnings may suffer.

“There is no reason why it shouldn’t hit German companies,” said Andreas Moeller, an economist at WGZ Bank in Dusseldorf. “For now, companies are still shielded by high profit margins, but stagnation or recession in Europe, which is still the largest export market, will also hurt our growth.”

Ifo’s measure of current conditions fell to 116.7 from 117.9, while a gauge of executives’ expectations retreated to 97 from 97.9. The euro declined after the report before recovering to trade little changed at $1.3740 at 10:50 a.m. in Frankfurt.

‘Downward Spiral’

French business confidence declined for a fourth straight month in October, national statistics office Insee said today, amid concern that the debt crisis and slowing global growth will crimp demand.

“It supports the view that the euro zone is heading for a modest recession,” said Holger Schmieding, chief economist at Joh Gossler Berenberg & Co in London. The region “is trapped in a downward spiral ” and “needs a circuit breaker,” he said.

While Germany’s Bundesbank on Oct. 17 predicted “strong” growth in the third quarter due to a rebound in industrial production and private consumption, it said the outlook has deteriorated.

Germany’s top economic institutes on Oct. 13 cut their 2012 forecast for growth by more than half, though they said Europe’s largest economy will probably avert a recession. Growth will slow to 0.8 percent next year from 2.9 percent in 2011, they said in a bi-annual report commissioned by the government. In April, the group forecast 2 percent growth for 2012.

‘Bank Crisis’

Vossloh AG (VOS), a German manufacturer of railroad equipment, cut its full-year sales forecast on Sept. 29, citing slower business in China and a “sharp reduction” in orders from southern Europe. Deutsche Bank AG on Oct. 4 scrapped its profit forecast and announced 500 job cuts and further writedowns on Greek bond holdings.

“Since the debt crisis has now become a bank crisis, the chances of recession are much higher,” Tobias Blattner, an economist at Daiwa International in London, told Ken Prewitt on Bloomberg Radio’s “The First Word.” “We’re expecting a technical recession at the beginning of next year.”

Some 17 months after Greece was first bailed out by euro- area nations, governments are still struggling to find a lasting solution to a crisis that has since engulfed Ireland and Portugal and is now threatening Italy and Spain.

French-German Split

A French-German split over the European Central Bank’s role in a rescue plan threatens to stymie progress on delivering the comprehensive strategy demanded by global leaders. France favors creating a bank out of the region’s rescue fund, allowing it to boost its financial clout by borrowing from the ECB -- a proposal that Germany rejects.

The crisis has made banks wary of lending to each other. Banks yesterday parked 188 billion euros ($258 billion) with the Frankfurt-based ECB overnight, up from 182 billion euros the previous day.

Rising employment may help shield the German economy from turmoil and bolster consumer demand. German unemployment declined more than economists forecast in September, pushing the jobless rate to 6.9 percent, the lowest since the country’s reunification two decades ago.

Thomas Lindner, head of Germany’s VDMA machine makers’ association, said on Oct. 18 that the industry is struggling to find enough skilled workers and forecast plant and machinery output will increase 4 percent next year. SAP AG (SAP), the world’s largest maker of business-management software, on Oct. 14 reported third-quarter earnings that beat analysts’ estimates.

“Germany is still one of the stronger economies in Europe, but if leaders don’t find a solution to the crisis pretty rapidly, it will suffer,” said Aline Schuiling, an economist at ABN Amro Bank NV in Amsterdam.

To contact the reporter on this story: Gabi Thesing in London at gthesing@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net

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