German Economic Outlook Darkens

Germans are growing more fearful of recession, according to key indicators, and this may make some companies cease hiring

Germany's business sector is growing increasingly pessimistic about its economic outlook, according to the key business sentiment index which declined in August for the third consecutive month.

"The German economy is encountering an increasingly more difficult situation," Hans-Werner Sinn, president of the Ifo institute that calculates the monthly index based on a survey of around 7,000 companies, said in a statement.

The business climate index fell by far more than expected to 94.8 in August from 97.5 in July. Economists polled by Reuters had on average predicted a slight drop to 97.1.

Ifo said companies saw a weaker export outlook and that retailers had turned more skeptical about the outlook for the next six months.

The index is regarded as the most important forward-looking indicator for the German economy, Europe's largest. Sinn said the latest figures were a sign that Germany's economic upturn is ending. The news hit German share prices and the euro, which fell more than a cent to below $1.46.

Earlier in the day, figures on Germany's consumer climate made similarly depressing reading. Market research firm GfK said its forward-looking consumer climate index declined to 1.5 points for September from 2.1 for August. It was the lowest level since mid-2003.

GfK said increasing fears of recession and rising prices of energy and food have hit consumer sentiment.

"There's a marked weakening of consumer sentiment," GfK expert Rolf Bürkl told Spiegel Online. "The high rate of inflation has put a spanner in the works of good economic growth."

Bürkl added that consumer sentiment was likely to remain negative in the coming months. "If one takes a look at the financial scope of private households, Christmas trading is unlikely to be very impressive," he said.

Meanwhile economists said the downturn in sentiment was likely to prompt many companies to cease hiring. "Companies are no longer planning to create new jobs," Ifo economic expert Klaus Abberger said.

German unemployment has declined steadily in the last two years, reaching 3.21 million in July or 7.7 percent. But the positive trend is likely to stop now. "The companies are becoming more pessimistic," said Andreas Scheuerle at Dekabank.

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