German Business Confidence Unexpectedly Weakened in January

  • Ifo business climate index falls to 109.8 vs estimated 111.3
  • Gauge for current situation improves, expectations fell

German business sentiment unexpectedly slipped in January from its highest level in almost three years in a sign that momentum in Europe’s largest economy may have weakened at the start of the year.

The Munich-based Ifo institute’s business climate index dropped to 109.8 from 111 in December. That compares with a median estimate of 111.3 in a Bloomberg survey of economists. Confidence in France, one of Germany’s biggest trading partners, also missed forecasts, with a gauge published by the national statistics office down 1 point to 104.

The Ifo report could raise concern that heightened political uncertainty will damp Germany’s economic prospects after growth in 2016 accelerated to the fastest pace in five years on the back of domestic spending. While the Bundesbank predicts job creation will continue to increase strongly, a gauge measuring private-sector activity slipped in January.

Germany is heading into a potentially turbulent year, with a general election in September set to pit the ruling party of Chancellor Angela Merkel against a strengthening populist movement. The start of formal talks about Britain’s exit from the European Union and the risk in trade disruption from the new U.S. administration under Donald Trump could also weigh on sentiment in the trade-oriented economy.

“Weakness in manufacturing is especially eye-catching and this probably has something to do with Trump and related fears of German exporters,” said Andreas Rees, an economist at UniCredit Bank AG in Frankfurt. “If you look at the fundamentals of the German economy, it looks really healthy, but the psychological environment has worsened and it remains to be seen whether it will develop into something more fundamental.”

The euro was little changed after the reports and traded at $1.0749 at 11:41 a.m. Frankfurt time.

A measure of current economic conditions rose to 116.9 from a revised 116.7, according to Ifo. Its gauge of expectations deteriorated to 103.2 from 105.5.

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