Ralph Atkins in Frankfurt
Published: April 25 2005 10:25 | Last updated: April 25 2005 10:25
German business confidence has tumbled to its lowest level for 18 months, the latest sign that eurozone economic growth is slowing significantly from an already-modest pace.
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The Munich-based Ifo institute said its business climate index had fallen for the third consecutive month, dropping to 93.3 from 94.0 in March. That was below analysts' forecasts and the lowest level since September 2003.
The Ifo survey is closely watched by financial markets and the European Central Bank. The latest drop will reinforce expectations that the ECB will leave interest rates unchanged, possibly until well into next year. The eurozone central bank has already held its main interest rate at 2.0 per cent for 22 months, one of the longest periods of unchange rates in post-war European history.
“Although the assessment of the current situation was relatively unchanged, the surveyed firms were more pessimistic with regard to their business expectations for the next six months than in March. This is an indication that economic growth will continue to be weak in the coming months,” said Hans-Werner Sinn, Ifo president.
Economic growth in Germany and other eurozone economies is thought to have rebounded at the start of 2005 after a weak second half of 2004 but to have slowed subsequently as a result of high oil prices and the strength of the euro.
“The strength of the euro, alongside strong commodity prices, is putting eurozone's exporters between a rock and a hard place,” said Julian Callow, economist at Barclays Capital. German domestic demand also remains weak amid still high levels of unemployment and a reluctance by companies to invest in the country, despite high levels of profitability.
Germany is the eurozone's largest economy and its weak performance is dragging down the region's overall growth prospects. However fears are growing about the outlook for Italy, which some economists believe is in recession. Domenico Siniscalco, Italy's economy minister, told an Italian newspaper that the Rome government would cut its forecast for growth this year to bring it in line with the European Commission's forecast of 1.2 per cent.
Despite the gloomy German outlook suggested by the Ifo index, Andreas Rees, economist at HVB group, said there was “still a pretty good chance that at least we will have a moderate growth acceleration in the second half of 2005,” citing hints of a pick up in the retail sector.
Ralph Solveen, economist at Commerzbank in Frankfurt, added: “Given the special conditions strong growth in the world economy and historically low interest rates we think it is unlikely that this is the start of a downturn.”