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German Ifo Business Confidence May Drop to Two-Year Low

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

The Ifo institute’s business climate index, based on a survey of 7,000 executives, will drop to 105.6 from 106.9 in May, according to the median forecast of 39 economists in a Bloomberg News survey. That would be the lowest reading since March 2010. Ifo releases the report at 10 a.m. in Munich today.

While Germany’s economy expanded 0.5 percent in the first quarter, latest data suggest growth is weakening as austerity measures across Europe curb demand for German goods. Exports, factory orders and industrial production all dropped in April and a survey of purchasing managers published yesterday shows manufacturing is contracting at the fastest pace in three years.

“Germany is not an island of the blessed,” said Jens-Oliver Niklasch, an economist at Landesbank Baden-Wuerttemberg in Stuttgart. “As long as the economic outlook doesn’t get better for the euro area as a whole, and especially for the southern countries, Germany will take a hit as well.”

Ifo’s gauge of the current situation may have slipped to 112 from 113.3 and a measure of executives’ expectations probably declined to 99.8 from 100.9, the survey of economists shows. Investor confidence plunged in June and the benchmark DAX share index has lost 11 percent in the last three months.

Growth Forecast

Rising wages and unemployment at a two-decade low are bolstering domestic spending, while demand from outside the 17-nation 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.

Still, Bayerische Motoren Werke AG, the world’s biggest maker of luxury vehicles, predicted on June 1 that Germany’s car market won’t grow in 2012 as the debt crisis weighs on consumer spending. The European Commission predicts 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 on investor concern about the health of the country’s banks, increasing pressure on governments to find a solution to the debt crisis.

“Germany has entered the second quarter with some momentum, but the intensifying euro crisis will leave its mark on growth in the third quarter,” said Andreas Scheuerle, an economist at Dekabank in Frankfurt. “With so much uncertainty about the currency union’s fate, companies are hesitating to undertake investments for the future that drive growth.”

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