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German June Business Confidence Drops to Two-Year Low

German business confidence fell to the lowest in more than two years in June as the worsening sovereign debt crisis clouded the economic outlook.

The Munich-based Ifo institute said today its business climate index, based on a survey of 7,000 executives, dropped for a second straight month to 105.3 from 106.9 in May. That’s the lowest reading since March 2010. Economists predicted a decline to 105.6, according to the median of 39 estimates in a Bloomberg News survey. Italian consumer confidence fell to a record low, a separate report showed.

“The euro area is clearly on the downward turn,” said Stella Wei Wang, an economist at Nomura International Plc in London. “If there is no quick political response to the crisis, the confidence shocks we see now in Europe will worsen the situation.”

Policy makers are struggling to contain a debt crisis that has now forced Spain into seeking aid for its banks. While exports to countries outside the euro area have helped Germany to weather the crisis, latest data show growth is weakening as austerity measures across the region curb demand. A survey of purchasing managers published yesterday shows German manufacturing is contracting at the fastest pace in three years.

Contraction ‘Possible’

European stocks fell for a second day, with the Stoxx Europe 600 Index down 0.7 percent at noon in Frankfurt. The euro was 0.1 percent higher at $1.2552.

“The German economy is clearly slowing down and a contraction in the second quarter looks possible,” said Carsten Brzeski, senior European economist at ING Group in Brussels. While Germany is on a sounder footing than its euro-area peers, “even the most solid ship can capsize in a rough thunderstorm,” he said.

Exports, factory orders and industrial production all dropped in April and investor confidence plunged in June. The benchmark DAX share index has lost 11 percent in the last three months.

Ifo’s gauge of current economic conditions rose to 113.9 from 113.2, while its measure of executives’ expectations dropped to 97.3 from 100.8.

In Italy, an index of consumer confidence fell to 85.3 in June, the lowest since the data series began in 1996, from 86.5 in May, national statistics office Istat said in Rome today. Economists forecast a reading of 86.

EU Summit

European Union leaders will meet at a June 28-29 summit in Brussels to try to resolve competing visions over how to reshape the euro economy, with Germany and its fiscally disciplined neighbors unwilling to foist additional burdens on their taxpayers.

In preparation for that summit, German Chancellor Angela Merkel travels to Rome later today for crisis talks with Italian Prime Minister Mario Monti, Spanish Prime Minister Mariano Rajoy and French President Francois Hollande.

The crisis is damping global growth. The Federal Reserve this week cut its estimates for the U.S. economy and expanded its stimulus program.

China’s manufacturing shrank for an eighth month in June, matching the streak during the global financial crisis, according to a preliminary reading of a purchasing managers’ index from HSBC Holdings Plc and Markit Economics published yesterday.

Still, Asia is in a “better state of readiness” to face shocks as policies geared toward strengthening domestic demand anchor growth prospects, Malaysian central bank Governor Zeti Akhtar Aziz said in a speech in Jakarta today.

German Resilience

The German economy, Europe’s largest, expanded 0.5 percent in the first quarter, helping the euro area to avoid recession.

Rising wages and unemployment at a two-decade low are bolstering domestic spending, while demand from outside the currency area has helped to prop up exports. The Bundesbank on June 8 revised up its 2012 growth forecast for Germany to 1 percent from 0.6 percent.

“The German domestic economy is still doing well,” said Heinrich Bayer, an economist at Deutsche Postbank AG in Bonn. “We’ve got a pretty stable labor market and that should reflect in private consumption. The caveat for that scenario is that the euro crisis doesn’t escalate further.”

Ifo said confidence in manufacturing “dropped sharply.”

“The majority of manufacturers reported defensive recruitment plans for the first time in months,” Ifo President Hans-Werner Sinn said in a statement. “However, they expect further stimulus from exports.”

Global Demand

Bayerische Motoren Werke AG (BMW), the world’s biggest maker of luxury vehicles, predicts Germany’s car market won’t grow in 2012 as the debt crisis weighs on consumer spending. The carmaker has nevertheless set targets of record worldwide deliveries and pretax profit this year, fueled by demand in China and the U.S.

The European Commission forecasts the euro-area economy will shrink 0.3 percent this year. At least eight member states are in recession. Spain’s 10-year bond yield surged above 7 percent this month, the level that prompted Greece, Portugal and Ireland to seek bailouts.

“The big unknown quantity is the psychological effect related to the euro-zone crisis and financial turmoil,” said Andreas Rees, an economist at UniCredit in Munich. “If turbulence escalates further and fears in the real economy solidify in the next few months, companies may refrain from investing further.”

To contact the reporter on this story: Joseph de Weck in Frankfurt at jdeweck@bloomberg.net

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

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