German Business Confidence Fell in May on Greek Concern

German business confidence fell more than economists forecast in May as speculation that Greece might leave the euro area clouded the economic outlook.

The Munich-based Ifo institute said today its business climate index, based on a survey of 7,000 executives, dropped to 106.9 from 109.9 in April. That’s the steepest decline since August, when the region’s debt crisis spread to Italy and Spain, and below all 37 estimates in a Bloomberg News survey of economists. The median forecast was for a decrease to 109.4.

Concern about Greece’s future in the euro region mounted after elections this month failed to produce a government and saw support grow for parties opposed to austerity measures. A second ballot will be held on June 17. While Germany’s economy expanded more than forecast in the first quarter, helping to keep the euro area as a whole out of recession, another report today showed German manufacturing contracted at the fastest pace in almost three years in May.

“Today’s reports indicate that the second quarter will be significantly weaker than the first,” said Aline Schuiling, an economist at ABN Amro Bank NV in Amsterdam. “The euro region, Germany’s biggest export market, is struck by austerity and Greece is a story on its own. The German economy will stagnate in the second quarter at best and the euro region will contract again.”

‘People Feel Uncertain’

Ifo said its gauge of the current situation fell to 113.3 from 117.5, while a measure of executives’ expectations sank to 100.9 from 102.7. The euro extended losses after the report and traded at $1.2548 at 10:40 a.m. in Frankfurt, down 0.3 percent today.

“If you look at the indebtedness of some countries affected by the euro crisis, if you see what risks continue to exist, it means that lots of people feel uncertain, and uncertain people prefer to step back from purchasing,” Bayerische Motoren Werke AG board member and head of purchasing Klaus Draeger said at a conference in Stuttgart yesterday. “And we see this in the low vehicle sales in countries in southern Europe in particular.”

European leaders, who last night held their 18th summit in more than two years of crisis fighting, clashed over joint debt sales as they called on Greece to stick with the budget cuts needed to stay in the euro. The Bundesbank suggested yesterday that Germany could cope with a Greek exit.

Greek Exit

By “threatening not to implement the reform and consolidation measures it agreed to in return for sizable rescue programs,” Greece is “jeopardizing the continuation of aid payments,” Germany’s central bank said in its monthly report.

“Greece would have to bear the consequences of such a decision. The challenges for the euro area and Germany would be significant but manageable with the help of cautious crisis management.”

Gross domestic product in Germany, Europe’s largest economy, expanded 0.5 percent in the three months through March after contracting 0.2 percent in the fourth quarter of 2011. That offset GDP declines in at least five other countries and helped to prevent the euro-area economy from shrinking for a second straight quarter.

The European Commission predicts the 17-nation euro economy will contract 0.3 percent this year before returning to growth in 2013. It forecasts 0.7 percent expansion in Germany in 2012.

GDP Breakdown

As demand wanes in the euro region, German companies are focusing on faster growing Asian markets to fill order books. First-quarter profits at BMW, Volkswagen AG (VOW) and Daimler AG (DAI) all beat analyst estimates. VW’s Audi unit will create 2,000 new jobs in Germany this year.

Germany’s statistics office said today that first-quarter growth was mainly driven by trade and domestic consumption. Exports surged 1.7 percent from the first quarter, private spending rose 0.4 percent and government consumption increased 0.2 percent, while capital investment dropped 1.1 percent, according to the report.

A measure of activity in Germany’s manufacturing industry, based on a survey of purchasing managers by Markit Economics, fell to 45 in May, the lowest level since June 2009. A reading below 50 indicates contraction.

“Germany is suffering from weak demand in the euro region and benefiting from solid orders from the rest of the world,” said Ulrike Rondorf, an economist at Commerzbank AG in Frankfurt.

While companies from Hugo Boss AG (BOS) to Beiersdorf AG (BEI) say they are profiting from increasing consumer spending, Metro AG (MEO), Germany’s biggest retailer, said yesterday it’s sticking to a forecast that profit won’t rise this year as households fret about the outlook.

Consumer confidence dropped for a second month in May even as unemployment held at the lowest level in two decades and workers secured pay increases.

“German companies are quite optimistic but there are limits,” said Gerd Hassel, an economist at BHF Bank AG in Frankfurt. “The debt crisis will damp business confidence.”

To contact the reporter on this story: Jana Randow in Frankfurt at jrandow@bloomberg.net

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

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