German business confidence fell to the weakest level this year amid signs of slower growth in Europe’s largest economy.
The Ifo institute’s business climate index, based on a survey of 7,000 executives, declined to 109.7 in June from 110.4 in May. Economists predicted a drop to 110.3, according to the median of 40 estimates in a Bloomberg News survey.
A gauge of German manufacturing and services activity published yesterday showed slower growth than analysts anticipated and a similar measure signaled contraction in France, highlighting the euro area’s struggle to sustain its recovery. While the Bundesbank has said Germany’s economic outlook remains positive, the European Central Bank is relying on unprecedented stimulus to fuel growth and inflation in the 18-nation currency bloc.
The Ifo report “suggests that the German upswing will not accelerate further but may lose a little steam instead,” said Holger Schmieding, chief economist at Berenberg Bank in London. “Domestic fundamentals remain solid. We expect strong gains in employment, a major rise in real incomes supported by low inflation and buoyant construction to underpin economic growth of just above 2 percent for 2014 and 2015.”
The German economy expanded 0.8 percent in the first three months of the year, compared with growth of 0.2 percent in the euro area.
The euro fluctuated after the data, and was little changed at $1.3615 at 10:34 a.m. Frankfurt time. The DAX Index (DAX) of German stocks was little changed at 9,921.
Markit Economics said yesterday that German services activity slowed in June while manufacturing accelerated. A composite index for both industries declined to 54.2 from 55.6 in May, while a euro-area measure slipped to the lowest level since December.
Deutsche Lufthansa AG, Europe’s second largest airline, cut earnings forecasts on June 11 as a capacity splurge at Gulf competitors hurts prices and its own pilots protest against cost cuts. German investor confidence unexpectedly fell for a sixth month in June.
The Bundesbank predicts that the German economy expanded “only slightly” in the second quarter, and that the pace will pick up again in the second half of the year. The Frankfurt-based central bank released forecasts on June 6 projecting gross domestic product will increase 1.9 percent in 2014, 2 percent in 2015 and 1.8 percent in 2016.
The previous day, ECB President Mario Draghi cut interest rates for the euro area, taking the deposit rate below zero for the first time and the benchmark rate to a record-low 0.15 percent. He also announced targeted long-term loans to spur credit supply and said policy makers would intensify preparations to purchase securitized corporate debt.
“The first quarter was very strong in Germany, much stronger than expected, and some realignment was due,” said Aline Schuiling, senior economist at ABN Amro Bank NV in Amsterdam. “The rest of the euro zone is Germany’s main export market, and part of it is still in weak shape.”
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