(AFP) – Aug 26, 2008
FRANKFURT (AFP) — Germany faces the prospect of a full-blown recession after key surveys on Tuesday showed business and consumer confidence falling away in Europe's economic powerhouse.
The economy contracted 0.5 percent in the three months to June and economists, in light of the latest poor data, now question whether it could tip into recession, defined as two straight quarters of falling output.
A monthly business climate index calculated by the economic research institute Ifo fell from 97.5 points in July to 94.8 points this month, its lowest level since August 2005.
Household confidence as measured by the GfK institute meanwhile fell to a five-year low, owing to "subdued economic prospects and the expectation of additional price hikes."
The drop in Ifo's business climate survey was the third in a row and came after the country suffered its first quarterly decrease in economic activity in four years.
A sub-index that measures expectations for the coming six months dropped from 89.9 to 87.0 points, a level not seen since a German recession in 1993.
Business leaders were increasingly pessimistic in the manufacturing, business and service sectors, Ifo found.
In manufacturing, survey participants forecast weaker support from crucial exports and said they would observe more caution in hiring.
Germany has benefitted from falling unemployment but the trend has begun to slow and could put additional pressure on consumer confidence.
"The latest data from Germany have brought further evidence that the economy has taken a turn for the worse," said economist Jennifer McKeown at Capital Economics.
She called the decline in the Ifo index "a worrying sign that the economy is slowing fast."
The only bright spot in Ifo's data was in wholesale, where the current situation was seen "as slightly positive and the outlook is assessed less critically."
But retail customers surveyed by GfK were affected by the weaker economic conditions and by "negative headlines regarding the still ongoing financial crisis."
GfK said "consumers are not interpreting the marked decrease in crude oil prices as an all-clear signal when it comes to purchasing power" because they will face higher natural gas prices in the coming months.
Andreas Rees at UniCredit Markets highlighted that the Ifo six-month outlook had posted its twelfth decline in the last 15 months and was now at its lowest level since February 1993.
UniCredit Markets put the probability of Germany sliding into recession at more than 70 percent and said the decisive factor would be whether companies continued to invest.
"Much still appears possible from a sharp, but rather brief, interruption of growth (a "technical recession") to a pronounced recession," Rees and colleague Alexander Koch wrote in a research note.
UBS economist Martin Lueck tempered that view however, saying that falls in the Ifo index "look more to us like a normalisation following a period of exaggerated optimism, rather than early signs of a deep and painful recession."
He said Germany had just "fallen back in line with its European neighbours."
For Holger Schmieding at Bank of America, "with Spain turning down, Italy struggling and France losing a lot of momentum too, a serious German downturn would not bode well for the eurozone as a whole as well, to put it mildly."
Global Insight's Timo Klein forecast the European Central Bank would "cut (interest) rates in 2009 in reaction to retreating inflation and concurrent evidence of economic weakness."
Schmieding added: "The bank may also have to explain again the rationale behind its July rate increase" to 4.25 percent.
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