German Ifo Sentiment Fell After Winter Chilled Recovery: Economy

German business confidence fell for a second month in April after winter weather hindered the recovery in Europe’s largest economy, adding to signs that the European Central Bank may cut interest rates.

The Ifo institute in Munich said its business climate index, based on a survey of 7,000 executives, dropped to 104.4 from 106.7 in March. Economists in a Bloomberg News survey forecast a decline to 106.2, according to the median of 44 estimates.

Economists from UBS AG to Royal Bank of Scotland Group Plc predict policy makers will lower borrowing costs next week after gauges of manufacturing and services activity for April underscored weakness in output. ECB President Mario Draghi said on April 19 he hasn’t seen any improvement in economic data in the region as a whole, after hinting at the beginning of the month he might cut interest rates if the recovery faltered.

“The fact that even in the most robust core country, Germany, the surveys are disappointing lately should have implications for ECB policy,” said Gizem Kara, European economist at BNP Paribas SA in London. The ECB’s economic scenario “is unlikely to materialize” and “it should not take long for the central bank to act with the data flow continuing to disappoint,” he said.

Market Reaction

The euro dropped almost half a cent after the report before recovering losses. The single currency traded at $1.3011 at 11:47 a.m. in Frankfurt, up 0.1 percent on the day. Stocks rose around the world, with European shares headed for the biggest four-day rally since November, as speculation mounted that central banks will ease monetary policy.

The MSCI All-Country World Index added 0.4 percent at 11.50 a.m. in Frankfurt and the Stoxx Europe 600 Index rose 0.2 percent. Standard & Poor’s 500 Index futures jumped 0.3 percent.

Australia recorded its slowest core consumer price growth in 14 years, sending the nation’s currency lower as traders boosted bets the Reserve Bank will reduce interest rates to a record low next month. The Reserve Bank of New Zealand kept rates unchanged at a record low today, and said borrowing costs are expected to be held through the end of the year.

The U.S. Commerce Department may report orders for durable goods dropped in March, a Bloomberg survey showed.

Signaling Contraction

In Germany, companies’ assessment of current business conditions declined to 107.2 from 109.9, while a measure of expectations fell to 101.6 from 103.6.

Investor confidence, as measured by ZEW, declined more than forecast in April and a gauge of industrial output yesterday signaled contraction after the coldest March in 25 years dragged on German growth, raising the risk that the economy fell into a recession in the first quarter. It contracted 0.6 percent in the final three months of 2012.

The euro-area composite purchasing managers’ index of manufacturing and services remained at 46.5 in April, Markit Economics said yesterday. That’s below the 50 mark that divides contraction from expansion.

Euro-area banks tightened credit standards less in the first quarter as demand for loans declined, the ECB said in a report today. Borrowers’ risk and macroeconomic uncertainty remain the “main concerns” in setting lending policies, it said.

The ECB, which has kept interest rates at a record low of

0.75 percent since July, predicts the euro-area economy, Germany’s largest export market, will contract 0.5 percent this year before growing 1 percent in 2014. By contrast, the Bundesbank forecasts German growth of 0.4 percent this year and

1.9 percent next year.

No Pessimism

Bundesbank President Jens Weidmann said on April 13 that he “doesn’t share the pessimism” of those predicting stagnation in the domestic economy. The ECB will only cut interest rates if economic data worsen, he said last week.

Many German companies are compensating for falling sales in Europe by exporting to faster-growing markets like Asia and the U.S.

Robert Bosch GmbH, Europe’s biggest car-parts maker, predicts 2013 sales will increase as much as 4 percent as growth outside the region makes up for a recession in its home market. First-quarter sales were “subdued,” mainly because of the deteriorating economy in Europe, the company said on April 18.

Volkswagen AG, Europe’s largest automaker, plans to expand its model line-up 29 percent by 2015 in China. The company will offer 90 cars, sport-utility vehicles, vans and heavy trucks in the country compared with 70 models now, Jochem Heizmann, who runs the carmaker’s Chinese operations, said on April 19 at a Shanghai press conference.

Chinese Slowdown

Still, evidence of an economic slowdown in China is mounting, with a preliminary reading of a purchasing managers’ index released by HSBC Holdings Plc and Markit Economics yesterday falling to 50.5 from 51.6 in March.

“Global economic growth seems to be losing some pace going into the second quarter,” said Nick Kounis, head of macro research at ABN Amro Bank NV in Amsterdam. For Europe, “we see an excruciatingly slow recovery starting to take shape in the second half of the year as global growth gains pace and fiscal consolidation begins to ease.”

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