German business confidence unexpectedly fell to the lowest in more than 2 1/2 years in October as the sovereign debt crisis damped growth in Europe’s largest economy.
The Ifo institute in Munich said its business climate index, based on a survey of 7,000 executives, dropped to 100.0 from 101.4 in September. That’s the sixth straight decline and the lowest reading since February 2010. Economists predicted an increase to 101.6, according to the median of 39 forecasts in a Bloomberg News survey.
Financial markets have rallied since the European Central Bank pledged to do whatever is needed to preserve the euro and unveiled a plan to buy government bonds. Still, the German economy may contract in the fourth quarter as euro-area and global demand for its exports wanes, the Bundesbank said on Oct. 22. Germany’s manufacturing and service industries shrank more than economists forecast this month, another report showed today.
“These drops in the Ifo and the manufacturing and service industries are significant,” said Silvio Peruzzo, an economist at Nomura International Plc. in London. “We take it as an indication that the German economy is heading into a contraction in the fourth quarter.”
Ifo’s measure of executives’ expectations was unchanged at 93.2, while a gauge of the current situation dropped to 107.3 from 110.3. The euro fell more than quarter of a cent after the report to $1.2936.
While exports to faster-growing markets outside Europe and domestic spending have helped insulate Germany from the turmoil in the euro area, the debt crisis is leaving its mark.
German truckmaker MAN SE said on Oct. 12 that next year will be even tougher than 2012 after third-quarter orders slumped. The Munich-based company lowered its 2012 earnings forecast in July as weaker demand in Brazil added to woes in Europe.
German growth slowed to 0.3 percent in the second quarter from 0.5 percent in the first. “There are increasing signs that a perceptible expansion of economic growth in the third quarter of 2012 will be followed by stagnation or even a slight decrease in gross domestic product in the final quarter of the year,” the Bundesbank said in its monthly report.
A gauge of activity in the German manufacturing sector based on a survey of purchasing managers and published by Market Economics today fell to 45.7 from 47.4 last month. In the service industry it eased to 49.3 from 49.7. A reading below 50 indicates contraction.
A composite index for both industries in the euro area fell to 45.8, the lowest in more than three years. At least five of the 17 euro nations are in recession, including Spain and Italy.
“The euro-zone recession is still getting worse,” said Holger Schmieding, chief economist at Berenberg Bank in London. “In a disappointing set of data, the fact that the Ifo expectations index did not decline further offers the only ray of hope. In this sense, the survey results today do not dispel the hope that the euro economy could turn the corner early next year.”
Bayerische Motoren Werke AG, the world’s largest maker of luxury vehicles, will invest 200 million euros ($259 million) in a Brazil factory to boost sales, it said on Oct. 22. The company’s global nine-month sales through September increased 8.6 percent to 1.11 million vehicles.
The benchmark DAX share index has rallied 9 percent since ECB President Mario Draghi pledged on July 26 to do whatever it takes to preserve the euro.
“The risk of a euro-area member bankruptcy is significantly lower now than it was two months ago,” said Lothar Hessler, an economist at HSBC Trinkaus & Burkhardt AG in Dusseldorf. “Germany’s economy might stagnate in the second half of the year. But it will grow in 2013 because the worst part of the European debt crisis is behind us.”