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German business optimism fades as crisis bites

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DAVID McHUGH | June 22, 2012 05:54 AM EST | AP

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FRANKFURT, Germany — A key measure of German business optimism fell in June, another signal that the financial crisis could slow Europe's biggest economy in coming months and complicate the continent's effort to dig out of debt.

The Ifo institute index published Friday fell to 105.3 points in June from 106.9 the month before, worse than market analysts' expectations for a dip to 105.6. It was the second month in a row that the index has fallen.

Germany's export-oriented economy has been doing better than many others in Europe and grew 0.5 percent in the first quarter from the quarter before. But the survey suggests that things could get more difficult in coming months. Earlier this week, a separate survey of manufacturing activity indicated that key part of the economy is slowing.

Weaker economic growth could undermine Germany's financial ability and the willingness of its public – already grudging – to help rescue debt-troubled members in the 17-country eurozone. Germany is the biggest backer of bailout efforts because of its size.

The eurozone as a whole is lagging and expected to shrink 0.3 percent this year according to the European Union's executive commission. Banks, key providers of credit to the economy, are in trouble from bad real estate loans and losses on government bonds. Government efforts to quickly reduce deficits are also slowing many economies – Germany's biggest trade partners are other eurozone countries.

Spain is struggling to avoid needing a bailout, after asking for (EURO)100 billion ($127 billion) in loan aid from other countries to bail out its banks. Italy is also under pressure from high borrowing costs. Meanwhile, Greece is deeply in debt even after (EURO)107 billion in forgiveness from creditors and faces uncertainty over whether it can stay in the euro.

Analyst Carsten Brzeski at ING said the German economy still benefitted from low unemployment and wage increases for workers. But he wrote in a note to investors that "the Germany economy is clearly slowing down and a contraction ... in the second quarter looks possible."

"With austerity-driven slowdowns coming now also to more other core eurozone cuntries, an obvious cooling of the Chinese economy and a still not very dynamic U.S. recovery, order books are emptying quickly and companies have started to reduce stocks."

Andreas Rees, chief Germany economist at UniCredit, said fear of trouble from the crisis could keep German companies from investing in new production, hurting the economy. "The big unknown quantity is the psychological effect related to the eurozone crisis and financial turmoil," he said.

Nonetheless, Germany has received some benefits from the crisis. The turmoil has lowered the euro's exchange rate, making German exports cheaper for foreign customers. Demand for German government bonds as a safe haven for investor money has driven government borrowing costs down. Those low rates also influence the rates companies pay for credit, meaning lower costs and cheaper credit for investment.