German outlook dims as business confidence hits 14-month low

Clouds loomed over the German economy on Tuesday as business confidence in Europe's economic powerhouse fell to its lowest level in over a year.

According to the closely-watched business climate index calculated every month by the Ifo economic institute, business sentiment slumped to its lowest level since December 2014 in February.

The index fell to 105.7 points in the third consecutive monthly decline and the sharpest drop since October 2014.

"The majority of companies were pessimistic about their business outlook for the first time in over six months," said Ifo, with manufacturers in particular voicing deep concerns.

"Manufacturers' business expectations declined steeply, marking their largest downswing since November 2008," Ifo said.

"With production levels falling at the end of 2015, manufacturers fear that the downturn will continue," it added.

Official data had shown production declining in December as domestic and eurozone demand for German-made goods fell.

- Financial market shock -
But analysts said the latest Ifo reading also showed that Germany's powerful export industry was starting to wake up to global concerns roiling international markets.

"We think that business managers were hit by a financial market shock in the form of the latest turbulence on international equity markets," said UniCredit economist Andreas Rees.

"Furthermore, the risk of a Schengen break-up may have increasingly been noticed by German exporters," he said.

"Tighter border controls may lead to disruptions and higher costs," Rees said.

The day before, a study by the Prognos institute estimated that ending Europe's open-borders Schengen agreement would cost EU economies at least 470 billion euros ($520 billion) over a decade.

Rees said that while the economic fundamentals were solid, he had "to acknowledge the increasing downside risks which emerged recently.

"Persistent volatility on financial markets and geopolitical risks could weigh on exports and trigger a less favourable wait-and-see mode among German companies," he said.
- 'Solid and consistent growth' -

Commerzbank economist Joerg Kraemer said that "most economists who expect rising growth for the first half of the year ... will have to lower their growth forecasts for Germany and probably also for the eurozone."

The probability was growing that the European Central Bank would have to roll out more stimulus measures at its policy meeting next month, Kraemer argued.

ING DiBa economist Carsten Brzeski said the Ifo data showed that "global events have finally reached German companies' boardrooms".

"Expectations have taken another sharp hit from recent market turmoil, the adverse impact of low oil prices and renewed concerns about a slowing of the Chinese economy," he said.

Earlier, the federal statistics office Destatis confirmed a preliminary estimate that the German economy grew by 0.3 percent in the fourth quarter last year, the same rate of growth as in the preceding three months.

And over the whole of 2015, Germany's gross domestic product (GDP) notched up "solid and consistent growth" of 1.7 percent, Destatis said.

And there was good news with regard to the country's public finances, which showed their biggest surplus since unification in 1990.

Domestic demand is the main growth driver, with public and consumer spending both rising in the fourth quarter and investment also on the increase.

Natixis economist Johannes Gareis felt "there are reasons to believe that the first quarter of 2016 can see another round of rather solid domestic demand performance, while export growth is likely to be weak."

Falling exports had weighed on growth in the period from October to December.

"Overall, we expect the pace of growth to maintain at 0.3 percent going into the first quarter," said Gareis.

"With oil prices and inflation being down, private consumption should grow markedly, also reflecting solid employment and wage growth. Also, we expect that public consumption continues to provide a stimulus due to more spending on refugees," he said.

BayernLB economist Stefan Kipar insisted that the German economy "remains in an upturn."

However, "since weak demand from a number of key exports won't disappear immediately, growth in the first quarter is unlikely to come out much higher than at the end of last year."

And his forecast for growth of 1.8 percent for this year "could be a little optimistic," Kipar added.