June 25, 2018 / 8:10 AM / in 5 months

German business morale ebbs as trade dispute ramps up

BERLIN (Reuters) - Business confidence in Germany fell in June to its lowest in more than a year, suggesting the mood among company executives is darkening as the world edges towards a full-blown trade war.

Activity declined in all four sectors measured by the Munich-based Ifo institute in Monday’s survey - manufacturing, services, trade and construction.

The readings added to signs that Europe’s biggest economy is cooling after a strong 2017, though economists said a recession was not on the cards.

Ifo said its business climate index fell to 101.8, the lowest level since May 2017 and just beating a Reuters consensus forecast of 101.7. The index has now fallen in six of the last seven months.

“The boom is over... The discussion about a trade war ...is weighing on the mood. Uncertainty has increased slightly,” Ifo economist Klaus Wohlrabe told Reuters.

The institute said the June reading was taken before a row over migration broke out within Germany’s governing coalition that one economist called potentially more damaging than the tariff dispute.

Observers predicted the economy would continue to grow, albeit at a slower pace than last year’s 2.5 percent.

“The modest fall reaffirms our ...narrative of an economy slowing to a normal growth level,” Uwe Burkert of LBBW bank wrote in a note. “This is however no downturn and certainly no recession.”

Much of the German data published this year has pointed to a cooling economy.

Industrial activity and exports were weak in the first four months, and U.S. President Donald Trump is threatening to impose hefty tariffs on car imports from Europe - a trade that Germany dominates - on top of earlier unilateral duties on metals.

Business leaders are worried that a parallel trade confrontation between Washington and Beijing could harm German exporters who rely on the world’s two largest economies for growth.

‘NEVER COUNT GERMANY OUT’

Of potentially greater concern is a row over immigration within Chancellor Angela Merkel’s conservative alliance that has unsettled her coalition government three months after it took office.

The Christian Social Union (CSU), the Bavarian sister party of Merkel’s Christian Democrats (CDU), is threatening to impose entry restrictions at the border with Austria if she fails to secure a deal to distribute migrants more fairly among European countries at an EU leaders’ summit this week.

Merkel conceded that leaders had failed to find a joint solution to the issue in emergency talks on Sunday.

ING Diba economist Carsten Brzeski said German could easily weather existing U.S. tariffs on aluminium and steel, and “even significant U.S. import tariffs on cars might not affect demand, particularly if the euro remains weak.”

FILE PHOTO: The Frankfurt skyline with its financial district is photographed on early evening in Frankfurt, Germany, March 25, 2018. REUTERS/Kai Pfaffenbach/File Photo

But should the migration row cause Merkel’s government to collapse and trigger a snap election, more serious economic damage was likely.

“For the economy, this would mean further delays of the urgently needed investments, new structural reforms and strengthening of the (European) monetary union,” said Brzeski.

But in reference to the underperforming national soccer team’s last-minute victory in Saturday’s World Cup match against Sweden, he added: “Never count out Germany. Hope dies last, even if it takes until the very last second.”

Writing by Joseph Nasr; editing by John Stonestreet

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