German business confidence dropped for the fifth consecutive month in October with little sign of recovery in the next six months, according to a closely watched business index.

The Ifo business confidence index dropped to 87.7 points in October from 88.2 points in September, according to the Munich-based research institute.

The institute compiles the index by asking 7,000 company managers to rate the outlook of orders and investment for the next six months.

Yesterday's index showed that German business leaders appear less optimistic in the long run but more optimistic about their current prospects.

"Overall, in both western and eastern Germany, we're seeing a slight improvement in the current situation while [future\] prospects continue to deteriorate," said the Ifo in a statement.

The Ifo said that growing business confidence in the retail, wholesale and construction sectors was dragged down by pessimism in the manufacturing sector.

Mr Gernot Nerb, the Ifo's chief economist, stressed that there was still no sign of a recession on the horizon but, he said, that could change if disappointment continued with the new government.

"There's no sign of a faster upturn," said Mr Nerb, noting the uncertainty felt by business managers in the survey towards the new government's economic plans.

"The government's programme and the coalition agreement don't appear to have caused euphoria among firms but rather the opposite," he said.

The poor business-confidence climate is likely to dampen the mood of the Chancellor, Mr Gerhard Schröder. He is expected to devote much of his first speech to parliament this morning to the economy, putting forward measures to stimulate growth and get Germany's four million unemployed back to work.

Since last month's elections, the economic outlook in Germany has gone from bad to worse. Germany's six leading economic institutes have cut their growth forecast for this year and next to just 0.4 per cent and 1.4 per cent respectively. Mr Hans Eichel, the finance minister, announced last week that the public deficit this year would breach the 3 per cent of gross domestic product (GDP) ceiling set down in the EU's stability pact.

He blamed September's weak tax receipts for the breach. But, like his Irish counterpart, Mr Eichel has been accused of hiding the true state of Germany's finances from voters until after the election.

The defeated conservatives have accused the coalition government of cheating voters after Mr Schröder announced plans to raise taxes selectively and slash spending.