German business morale worsened for a second straight month in July as firms took a dimmer view of the economic outlook for the next six months and began to feel the impact of the strong euro.
The Munich-based Ifo economic research institute said its business climate index, based on a monthly poll of around 7,000 firms, fell to 106.4 from 107.0 in June. A Reuters poll of economists had pointed to a fall to 106.5.
"The high euro level is...reflected in the decline as it pressures the margins of companies," said Andreas Scheurle at DekaBank. "We are seeing a normalisation of growth. The peak of the upswing came at the end of 2006."
The Ifo index also fell in June and was unchanged in May. Euro zone government bond futures extended losses after the release of the July Ifo figures.
Ifo economist Gebhard Flaig said the strengthening of the euro had only had a slight dampening effect on Germany's economy but if it continued the situation could become critical.
The euro hit a record high of $1.3853 earlier this week.
Manufacturers were upbeat about the next six months, though they were less optimistic about exports, Ifo said.
The Ifo survey's current conditions gauge eased to 111.3 from 111.4 in June. A reading of 111.0 had been forecast. The survey's expectations gauge fell to 101.8 from 102.8 in June. The poll had pointed to a fall to 102.0.
Private consumption is not yet boosting growth but would next year, Flaig said. Economists expect the robust export growth that has fuelled Germany's recovery to weaken this year and are looking to private consumption to pick up the slack.