German business morale posted its steepest drop this month since the aftermath of the Lehman Brothers collapse in late 2008, raising fresh doubts about the broader European economy as it grapples with a crippling debt crisis.
The Munich-based Ifo think tank said today its closely-watched business climate index, based on a monthly survey of some 7,000 firms, fell to 108.7 in August from 112.9 in July.
The last time the index fell so sharply was in November 2008, just after the collapse of Lehman Brothers when the German economy was in its deepest post-war recession. It was the lowest reading for the index since June of last year.
Ifo economist Klaus Abberger said the slowdown of the US economy and twin debt problems in the US and Europe were the main reasons for the worsening outlook.
"The German economy has been infected," Mr Abberger said. "I wouldn't speak of a recession at this moment. The companies still have a cushion of orders. And not every cooling results in a recession, but the recovery is slowing very significantly."
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The German economy has been a pillar of strength since the debt crisis in the euro zone first broke out in Greece at the end of 2009.
But data last week showed gross domestic product (GDP) growth slowed to a meagre 0.1 per cent in the second quarter of the year, pushed down by weakening private consumption and declines in the construction sector.
The Ifo index suggests the slowdown could be more precipitous than many economists had thought, removing a key crutch for the single currency bloc, whose vulnerable peripheral economies are depending on strong demand from their northern partners to help them out of their debt holes.
A weakening economy could make Germans more reluctant to splash out money to help countries like Greece, for whom a second rescue package was agreed by European leaders last month. That deal, which must be approved by national parliaments to go into force, has run into trouble over Finnish demands that Greece put up collateral to offset the loans it receives.
Carsten Brzeski, an economist at ING, described a sharp decline in the Ifo's expectations index as a "serious warning".
That subindex tumbled to 100.1, its lowest in almost two years, from 105.0 in the prior month.
Yesterday, a separate gauge of analyst and investor sentiment published by the Mannheim-based ZEW institute fell by its largest amount in five years. Data this week also showed growth in German business activity was its weakest in 25 months in August as new orders fell.
Germany's bluechip DAX index has shed almost a quarter of its value since the start of the month amid fears a global slowdown will dampen demand for the country's exports. In addition to economic weakness in the United States, the Chinese economy is also slowing. China has emerged as a key export market for German firms over the past decade.
Some leading companies, such as steelmaker ThyssenKrupp, have warned recently about increased uncertainty in US markets.
Although a recession in Germany does not seem inevitable at this point, some economists said the worst was yet to come.
Reuters
