European Economies: German Business Confidence Drops (Update1)
Nov. 25 (Bloomberg) -- Business confidence in Germany, Europe's largest economy, fell to the lowest in more than a year in November as the euro's climb to a record threatened exports and unemployment at a five-year high crimped consumer spending.
The Munich-based Ifo institute's confidence index declined to 94.1, the lowest since September last year, from 95.3 in October. Economists predicted a reading of 94.8, the median of 43 forecasts in a Bloomberg survey showed. Italian manufacturers also became more pessimistic, the Rome-based Isae Institute said today.
``The stronger euro is hurting us,'' said Ralph Wiechers, chief economist at the VDMA machinery industry group in Frankfurt, whose 3,000 members include DaimlerChrysler AG. ``We're already seeing a weakening of the boost from the U.S. and China and now we have an extra brake on growth. The question now is whether the domestic economy is strong enough to deal with it? I doubt it.''
Germany's reliance on exports makes it vulnerable to the euro's 10 percent increase against the dollar in the past three months. Faltering growth in Germany drags down expansion across the dozen nations sharing the euro, which have already been hurt by rising oil costs and concerns about job security.
The euro today rose above $1.32 for the first time since its introduction in 1999. Merrill Lynch & Co. said yesterday it expects the euro to rise as high as $1.39 by the end of March.
``In addition to Germany's structural problems, which have decoupled the domestic economy from the world economic boom, the high price of oil and the stronger euro have now also had an impact,'' Ifo President Hans-Werner Sinn said in a statement.
Energy Effect
The price of crude rose to a record $55.67 per barrel last month, eroding global demand and boosting companies' costs. German exports dropped for the first time in more than a year in the third quarter, almost bringing economic growth to a halt.
Ifo, one of Germany's six main research institutes, said an index tracking the assessment of companies' current business fell to 93.8 from 94.7, the first decline since June. A measure of future expectations dropped to 94.3 from 95.9. Ifo surveys 7,000 companies each month for the confidence index.
``There are some uncertainties at the moment, they're weakening somewhat as regards oil, but not as regards the euro,'' Economy and Labor Minister Wolfgang Clement said today in a speech to the lower house of parliament in Berlin.
German Chancellor Gerhard Schroeder yesterday said the euro's exchange rate against the dollar ``worries'' him.
Profit Pressure
``Clearly the strength of the currency will put pressure on German companies' price competitiveness and their profits,'' said Silvia Pepino, an economist at JPMorgan Chase & Co. in London. JPMorgan yesterday cut its 2005 growth forecast for the dozen- nation euro region to 1.9 percent from 2.1 percent, partly because of the euro's appreciation.
With U.S. policy makers showing few signs of sharing Schroeder's concern, exporters may have to get used to a stronger euro. U.S. Treasury Secretary John Snow last week said exchange rates are best set by markets and Federal Reserve Chairman Alan Greenspan said Nov. 19 foreign investors may soon lose appetite for dollar-denominated assets.
``The dollar could weaken even further, and make a recovery more fragile,'' Paolo Garonna, chief economist at Confindustria, which represents Italy's biggest manufacturers including Fiat SpA, said in a telephone interview in Rome. Confidence among Italian manufacturers fell to a six-month low in November, Isae said.
Saving More
German consumer spending is struggling to take up the slack left by slowing export growth as companies including General Motors Corp. cut jobs. The country's BAG retail industry group forecast on Nov. 17 that sales will decline for a third year in 2004 as Germans step up saving on concern about job prospects.
Germany's saving ratio, the amount consumers save as a proportion of disposable income, rose to 11.1 percent in the third quarter, the highest since 1995. Germany's unemployment rate stayed at 10.7 percent in the third quarter.
``There are no signs that domestic demand will increase in the near future,'' said Klaus Abberger, head of Ifo's business survey department, in an interview.
Three of the four sub-indexes gauging prospects for individual industries fell this month. Conditions for wholesalers, retailers and manufacturers deteriorated, Ifo said. Prospects for construction companies were unchanged from October.
ECB Meeting
With growth prospects dimming and the euro's increase making imports cheaper, the European Central Bank is toning down concerns about inflation. While ECB President Jean-Claude Trichet said on Nov. 4 the outlook for prices is ``worrisome,'' Bundesbank President Axel Weber said this week he assumes inflation will slow below the ECB's 2 percent ceiling next year.
The ECB, whose 18-member governing council meets to set rates on Dec. 2, ``will be able to keep interest rates at the current level'' of 2 percent, Ifo's Abberger said.
Slowing inflation makes it easier for the bank to keep borrowing costs low. The German inflation rate declined this month as falling oil prices helped bring down the cost of energy, reports from six German states in the past three days showed.
Investors have reduced expectations that the ECB will raise interest rates in the first half of next year, futures trading shows. The yield on the June Euribor interest-rate futures contract dropped four basis points to 2.30 percent at 12:39 p.m. in Frankfurt. A basis point is 0.1 of a percentage point.
The contracts settle to the three-month euro area inter-bank offered rate for the euro, which has averaged 15 basis points more than the ECB's key rate since the currency's launch in 1999. The Euribor three-month money market rate was 2.18 percent today.
To contact the reporter for this story:
John Fraher in Frankfurt at jfraher@Bloomberg.net
To contact the editors responsible for this story:
Heather Harris at hharris@bloomberg.net.
Chris Kirkham at ckirkham@bloomberg.net.
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