German morale drop hints at contraction in quarter

Berlin: German business sentiment fell for the first time in almost a year in February, suggesting a harsh winter may send Europe's largest economy sliding back into contraction in the first quarter.

The Munich-based Ifo think tank said yesterday its business climate index, based on a monthly survey of some 7,000 firms, fell to 95.2 from 95.8 in January. A Reuters poll of economists had forecast the index would show a reading of 96.1.

Ifo attributed the drop in morale to a strong downturn in retail sales, possibly due to a harsh winter which also weighed heavily on construction activity.

"The first quarter will be hit hard by the weather and economic activity could even decline," Ifo economist Klaus Abberger told media.

Car sales plunge

Elsewhere in the euro zone, French consumer spending fell at its fastest pace in two years in January as car sales plunged, data yesterday also showed, while Italian consumer confidence posted a surprise fall in February, declining to its lowest level since last July.

Economy Minister Rainer Bruederle said he was not surprised by the fall in German business morale, and that the country still does not have a self-sustaining recovery.

Chancellor Angela Merkel's previous government passed twin stimulus packages to support the economy, which pulled out of its deepest post-war recession in the second quarter of last year before stalling in the final three months of 2009.

Analysts said the economy may make up any ground it loses over the winter later this year.

"The decline [in Ifo] shouldn't be seen all that negatively," said Juergen Michels at Citigroup.

"The cold winter has hit the retail sector hard because a lot of consumers opted to stay at home due to the slippery streets and sidewalks."

"But that's just a temporary effect that will be corrected as the weather conditions improve," he added. "The falling euro is positive for sectors dependent on exports. They view that to be as important as the financial crisis in Greece."

An index on current conditions fell to 89.8 from 91.2 in January, but another on business expectations edged up to 100.9 from 100.6.

The fall in the headline reading mirrored a drop in German analyst and investor sentiment in February — a decline which came against the backdrop of market jitters about Greece's debt woes and the potential reverberations through the euro zone.

Other economic indicators have pointed to a bumpy recovery.

Manufacturing orders for December shocked markets with a 2.3 per cent monthly fall, hit by a drop in foreign demand. Industrial output also fell sharply in the same month, putting Germany's manufacturing core on a weakened footing for 2010.

However, a purchasing managers' index released on Friday showed a rise in output helped German manufacturing activity expand in February at its fastest rate since June 2007, pointing to a healthy resumption of growth.