February 22, 2018 / 9:59 AM / 6 months ago

German business morale falls as exporters fret about strong euro

BERLIN (Reuters) - German business confidence fell more than expected in February while remaining at a high level, a survey showed on Thursday, suggesting that Europe’s biggest economy is set for solid growth despite a stronger euro clouding the outlook of exporters.

FILE PHOTO: VW Golf cars are pictured in a production line at the plant of German carmaker Volkswagen in Wolfsburg, March 9, 2017. REUTERS/Fabian Bimmer/File Photo

The Munich-based Ifo economic institute said its business climate index, based on a monthly survey of some 7,000 firms, fell to a 5-month low of 115.4 from 117.6 in January.

The February reading undershot expectations in a Reuters consensus forecast of analysts who had forecast a dip to 117.0.

Ifo chief Clemens Fuest said companies were less satisfied with their current business situation, but the indicator still was at its second-highest level since 1991.

“This signals economic growth of 0.7 percent in the first quarter,” Fuest said. In the final three months of 2017, the economy expanded by 0.6 percent on the quarter.

This upbeat growth outlook was also mirrored in the finance ministry’s monthly report released earlier on Thursday which said recent data was pointing to a continuation of the economic upswing at the beginning of the year.

In another sign of the overall robust state of the euro zone economy, French industry morale in February edged down only slightly from a more than 17-year high reached in the previous month, data showed on Thursday.

The drop in the German headline figure was mainly caused by managers scaling back their business expectations for the next six months, with the respective sub-index falling to a 10-month low.

“The export euphoria is flattening out a bit,” Ifo economist Klaus Wohlrabe told Reuters. He said some exporters were more concerned now about the stronger euro exchange rate which makes German products more expansive for clients outside the bloc.

Wohlrabe added that the fall in the business sentiment index did not mark the beginning of a fundamental shift.

“I would not yet speak of a change in the underlying trend, the German economy is still doing very well, but some of the steam has been let off,” Wohlrabe said.

DAMPENER

He added that the coalition deal reached by Chancellor Angela Merkel’s conservatives and the centre-left Social Democrats had not been a cause for jubilation among managers.

Thomas Altmann from fund manager QC Partners pointed to the stronger euro and the prospect of rising interest rates as causing concerns for chief executives.

“The Ifo business climate index is a clear dampener,” he said.

VP Bank chief economist Thomas Gitzel said another factor could have been that some exporters are worried about the rising threat of protectionism since U.S. President Donald Trump could impose tariffs on steel and aluminum imports by April.

A sector breakdown of the Ifo figures showed the main drag came from manufacturing, where the mood among managers had hit a record high in the previous month. Business sentiment also deteriorated in wholesaling, construction and retailing.

Stephen Brown from London-based Capital Economics said the Ifo index suggested that German economic growth was nearing its peak, but should remain strong.

“Weaker expectations could reflect a number of factors, not least the relatively strong euro, signs of slowing demand from China and the drop in German equity prices earlier this month,” Brown added.

The Bundesbank sees the German economy expanding by a calendar-adjusted 2.5 percent this year which would be the strongest pace since 2011. However, the central bank predicts growth to slow to 1.7 percent in 2019.

The Ifo figures chimed with other sentiment surveys released earlier this week that showed growth in Germany’s private sector slowed in February while investor sentiment also deteriorated.

FILE PHOTO: An engine of a Golf VII car is pictured on a production line at the plant of German carmaker Volkswagen in Wolfsburg, Germany, May 20, 2016. REUTERS/Fabian Bimmer/File Photo

Reporting by Michael Nienaber in Berlin, additional reporting by Michel Rose in Paris; Editing by Paul Carrel and Toby Chopra

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