German Business Confidence Unexpectedly Drops

German business confidence unexpectedly fell from a 10-month high in March as Cyprus inflamed the euro region’s debt crisis.

The Ifo institute in Munich said its business climate index, based on a survey of 7,000 executives, declined to 106.7 from 107.4 in February. That’s the first drop in five months. Economists predicted a gain to 107.8, according to the median of 42 forecasts in a Bloomberg News survey. In France, industrial confidence was unchanged this month.

With the European Central Bank threatening to cut off emergency funding for Cyprus’s banks unless it agrees to the terms of a European Union-led bailout, the tiny Mediterranean island has re-ignited concerns about the euro and roiled financial markets. Still, German investor sentiment unexpectedly rose to a three-year high this month and the Bundesbank said the nation’s economic recovery remains on track.

“While the decline in confidence is certainly a damper after the recent surge in optimism, the scenario of a moderate recovery gradually picking up speed in the course of the year hasn’t changed,” said Heinrich Bayer, an economist at Deutsche Postbank AG in Bonn. Uncertainty around Cyprus may weigh on the outlook for companies, “but it probably won’t have any real consequences for the German economy,” he said.

Executives’ Expectations

Ifo’s gauge of executives’ expectations fell to 103.6 from 104.6 last month, while a measure of current conditions eased to 109.9 from 110.2.

The euro fell after the report before recovering to trade at $1.2940 at 11:48 a.m. in Frankfurt, up 0.2 percent today. The Stoxx Europe 600 Index dropped 0.3 percent to 293.69.

Some recent indicators have pointed to weakness in Europe’s biggest economy.

A gauge of activity in Germany’s manufacturing industry, based on a survey of purchasing managers, unexpectedly fell below 50 this month, signaling contraction. Gauges of activity in the euro-area manufacturing and service industries also showed them shrinking at a faster pace than economists forecast.

The French economy will extend two years of stagnation in the first half as consumers hold off on spending and companies cut investment, national statistics office Insee predicted yesterday. Gross domestic product will be unchanged in the first quarter and expand 0.1 percent in the second, it said.

Sentiment among French manufacturing executives remained unchanged in March as domestic demand failed to improve, Insee said in a report today. Economists had forecast a small gain.

Weaker Forecasts

The ECB lowered its projections earlier this month to predict the euro-area economy will contract 0.5 percent this year before growing 1 percent in 2014. By contrast, the Bundesbank estimates German growth of 0.4 percent this year and 1.9 percent next year.

Schaeffler AG, the industrial-bearing maker that’s the biggest investor in car-parts producer Continental AG, said yesterday that demand in North America and Asia will more than make up for a drop in Europe to allow revenue growth of about 4 percent in 2013.

K+S AG, Europe’s largest potash maker, predicted on March 14 that earnings and sales will rise “slightly” this year.

Germany’s benchmark DAX share index is up more than 4 percent this year and unemployment dropped for a third month in February.

Still, Beiersdorf AG, the maker of Nivea skin cream, missed analyst estimates for 2012 profit and Adidas AG, the world’s second-largest sporting-goods maker, reported a fourth-quarter loss on March 7.

“We do not want to ignore downside risks stemming from renewed political uncertainty and the relatively broad-based deterioration in survey indicators elsewhere,” said Evelyn Herrmann, an economist at BNP Paribas SA in London. “But on the basis of data prints available today, there is little reason to change our assessment that the German economy returned to growth in the first quarter.”