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German March Business Confidence Declines

German March Business Confidence Declines

March 23 (Bloomberg) -- Business confidence in Germany, Europe's largest economy, unexpectedly fell to an 18-month low in March as oil prices surged to a record and the euro's increase against the dollar weighed on exporters.

The Ifo institute in Munich said today its business confidence index fell to 94, the lowest since September 2003, from a revised 95.4 in February. Economists expected an unchanged reading, the median of 43 forecasts in a Bloomberg survey showed.

The euro and European stocks dropped after the report on concern the German economy is struggling to rebound from a fourth- quarter contraction. A 35 percent increase in oil prices this year is imposing additional costs on companies already squeezed by a three-year slump in consumer spending.

``The increase in oil prices and the appreciation of the euro are basically eating up the modest recovery that is gradually emerging,'' said Lorenzo Codogno, co-head of European economics at Bank of America in London.

The euro's 6 percent gain against the dollar in the past six months is making German goods more expensive abroad. The euro fell as much as 0.5 percent today to $1.3018 and traded at $1.3051 at 12:03 p.m. in Frankfurt. Germany's benchmark DAX 30 stock index declined 0.8 percent to 4285.98 points.

Ifo's index measuring the current situation dropped for a third consecutive month to 93.3 from 94.5. ``The hope for a recovery in investment demand has not materialized,'' Ifo President Hans-Werner Sinn said in a statement. The institute's gauge of future expectations dropped to 94.6 from 96.4.

Moving East

Orders ``have been moderate in the past few months because the German economy isn't doing so well,'' said Wolfgang Reitzle, chief executive officer of Linde AG, a German maker of forklifts and industrial gases, in an interview. ``We'll concentrate on Eastern Europe. Those countries are growing, not least because German companies are shifting production there.''

Germany has dragged down the pace of growth in Europe for the past nine years. Companies including Infineon Technologies AG, Europe's second-biggest chipmaker, and Deutsche Bank AG, Germany's biggest bank, are cutting jobs in Germany or moving them abroad in response to slowing growth and falling consumer spending.

Germany and Italy were the worst-performing economies in the Group of Seven nations last year. In Italy, the third-largest of the 12 economies in the euro region, consumer confidence unexpectedly fell this month. The Isae Institute said in Rome today its index of sentiment declined to 104.1 from 104.4.

Energy Burden

Consumers and companies are feeling the squeeze from increased energy costs. Brent crude climbed to a record $56.15 a barrel on March 17 on concern demand will outstrip supply. Prices fell for a second day in London today to $54.35 on concern the U.S. Federal Reserve will accelerate the pace of interest rate increases, slowing global economic growth and demand for fuel.

``So far we have not seen any pickup in domestic demand,'' Bundesbank council member Hans Reckers said in an interview yesterday. ``We have a higher savings rate than two years ago, incomes are rising less and unemployment is not declining, so I see no improvement in domestic demand this year.''

The HWWA institute in Hamburg on March 21 cut its 2005 growth forecast, the fourth of the six main government-funded institutes to do so this month. The HWWA said growth will slow to 0.6 percent this year from 1.6 percent in 2004. In December, the institute predicted 0.9 percent expansion.

Signs of Recovery

By contrast, the U.S. economy will probably expand 3.8 percent in 2005, according to the median forecast of 64 economists in a Bloomberg survey. The Federal Reserve yesterday raised its benchmark interest rate another quarter point to 2.75 percent and said pricing pressures have increased. The European Central Bank has kept its main rate at 2 percent since June 2003.

Germany's economy has shown some signs of recovering from a 0.2 percent contraction in the final quarter of 2004. Industrial production increased in January after factory orders surged the most in more than a decade the month before. Investor confidence rose to a six-month high in March, according to the ZEW institute.

``Oil prices are high, but that probably reflects strong growth elsewhere, so it's not all bad news,'' said Elga Bartsch, an economist at Morgan Stanley in London. ``On balance we see the recovery continuing, but not really gaining momentum.''

German Chancellor Gerhard Schroeder cut income taxes by 6.5 billion euros ($8.6 billion) in January, bolstering optimism among some executives that consumer spending, the largest part of the economy, may recover from a three-year slump.

Deficit Concession

Metro AG Chief Executive Officer Hans-Joachim Koerber, who heads the world's third-largest retailer, said yesterday he expects consumer spending and economic growth in Germany to pick up ``slightly'' in the second half of this year.

Schroeder this week won a concession from European Union finance ministers to ease restrictions on budget deficits in order to boost growth. Finance chiefs agreed to let countries in the 12- nation euro region top the deficit ceiling of 3 percent of gross domestic product when growth is slower than forecast or ``relevant factors'' such as Germany's costs for rebuilding its ex-communist East, force up spending.

``The changes to the Stability and Growth Pact could boost sentiment going forward,'' said Tamara Henderson, director of fixed income strategy at Action Economics LLC in Singapore, whose prediction of an Ifo reading of 95 was the lowest in the Bloomberg survey. ``But if I was in Germany I would be cautious, particularly with oil at this price.''


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