German Confidence Falls for First Time in Five Months

German business confidence fell for the first time in five months as companies assess the risks to trade from escalating European Union sanctions against Russia.

The Ifo institute’s business climate index, based on a survey of 7,000 executives, fell to 110.7 in March after reaching 111.3 the prior month, the highest level since July 2011. Economists predicted a decline to 110.9, according to the median of 44 estimates in a Bloomberg News survey.

While the Bundesbank says German economic growth probably strengthened “substantially” in the first quarter, the outlook is threatened by rising tension with Russia and an economic slowdown in China. A gauge of German manufacturing and services output is at the lowest level since December.

“German growth prospects for 2014 could be harmed if exports to Russia and eastern Europe remain stagnant or if China’s slowdown is confirmed,” said Annamaria Grimaldi, an economist at Intesa Sanpaolo SpA in Milan. “But looking at growth at the end of 2013 and at the beginning of this year, the indications remain positive for the coming months.”

A measure of current conditions rose to 115.2 in March from 114.4 the prior month, Ifo said. A gauge of expectations dropped to 106.4, the lowest level since October.

Sanctions Risk

The euro was little changed at $1.3825 at 10:34 a.m. Frankfurt time. Germany’s DAX stock index was 1.2 percent higher at 9,294.

China’s manufacturing industry weakened for a fifth straight month in March, deepening concern the country will miss its 7.5 percent growth target this year. China was Germany’s biggest trading partner outside of the euro area in 2012, with imports and exports between the nations totaling $169 billion.

Business leaders in Germany, Europe’s largest economy, have urged politicians to consider the impact that sanctions against Russia could have on growth. The two countries had $89 billion of trade with each other in 2012. The EU, which relies on Russia for a third of its energy imports, and the U.S. have imposed travel bans and asset freezes since Russia annexed Crimea and massed troops near Ukraine’s eastern border.

Four of the 30 non-financial companies with the largest revenue exposure to Russia are German, including Metro AG and Adidas AG, according to Morgan Stanley. Rheinmetall AG shares fell the most in more than four months on March 20 after the German government halted the defense company’s deal to build a military training center in Russia’s Volga region.

Growth Outlook

Even so, the Bundesbank said yesterday that German orders, production expectations and an improving assessment of current economic conditions “point to very strong growth in the first quarter.” It will probably be followed by a “significantly lower” rate of expansion in the three months through June, the Frankfurt-based central bank said.

German economic growth of 0.4 percent in the fourth quarter beat analysts’ estimates, bolstered by exports and investment. Economists predict growth will accelerate to 0.5 percent in the first three months of this year, according to a separate Bloomberg News survey.

While a survey of purchasing managers by Markit Economics Ltd. released yesterday showed German manufacturing and services activity declined this month, it still remained near the highest in three years. German investor confidence slid for a third month after reaching a seven-year high in December.

ECB Rates

“The softening in German survey indicators might start to signal somewhat slower growth in the second quarter than in the first quarter,” said Evelyn Herrmann, European economist at BNP Paribas SA in London. “In comparison with the pace of growth which we suspect could be achieved in the first quarter, however, this should really not be a reason for concern at this stage.”

The European Central Bank left its benchmark interest rate at a record-low 0.25 percent on March 6 and committed to keep euro-area borrowing costs accommodative until after the economy is showing signs of improvement. It predicts growth in the 18-nation euro region of 1.2 percent this year, accelerating to 1.8 percent in 2016.

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