German Business Climate Drops in Sign of Economic Risks

German business confidence dropped more than economists predicted to the lowest level since October as weaker growth and escalating tensions in Ukraine weigh on the outlook for Europe’s largest economy.

The Ifo institute’s business climate index, based on a survey of 7,000 executives, fell to 108 from 109.7 in June, marking the third straight monthly decline. Economists predicted a reading of 109.4, according to the median of 35 estimates in a Bloomberg News survey.

Today’s report follows a series of weak economic data for Germany that included industrial production dropping for a third month in May, factory orders falling more than economists expected and retail sales decreasing for a second month. Gross domestic product may have remained unchanged in the second quarter from the previous one, when it rose 0.8 percent, the Bundesbank said this week, and political uncertainty in some of the country’s export markets may damp growth going forward.

“The third decline of the Ifo index in a row is disappointing,” said Ralf Umlauf, an economist at Helaba in Frankfurt. “The overall high level of the Ifo indexes still suggests an expansion of the German economy, even though the momentum in the second quarter may have probably almost stalled.”

Ifo Breakdown

Ifo’s gauge of current conditions fell to 112.9 in July from 114.8, while a measure of expectations declined to 103.4 from 104.8 in June.

The euro dropped almost a quarter of a cent after the report and traded at $1.3450 at 10:10 a.m. Frankfurt time.

Construction declined in the second quarter after activity was bolstered by mild weather at the beginning of the year, while manufacturing suffered from political woes outside the country, according to the Bundesbank.

Yet, gauges of factory and services activity suggest the economic slowdown may prove temporary. A Purchasing Managers Index for services expanded at the fastest pace in three years in July and manufacturing accelerated.

Germany “is growing at a robust 0.7 to 0.8 percent pace at the start of the third quarter,” Chris Williamson, chief economist at London-based Markit Economics, said yesterday.

Companies’ performance and their business outlook diverge. Berlin-based Zalando SE, Europe’s largest online-only shoe and fashion retailer, broke into profit in the second quarter and envisions an initial public offering as early as this year, while Software AG, Germany’s second-biggest software maker, lowered its full-year forecast this month.

The Bundesbank predicts the German economy will grow 1.9 percent this year, 2 percent in 2015 and 1.8 percent in 2016. That compares with European Central Bank forecasts for the euro area of 1 percent in 2014, 1.7 percent next year and 1.8 percent in 2016.

Before it's here, it's on the Bloomberg Terminal.