Germany leads drop in euro zone business sentiment - extended

Analysis

German and French business morale fell sharply in April, depressed by a triple-whammy of high oil prices, a strong euro and market turmoil and raising questions about whether the ECB will keep up its hawkish tone.     

The stronger-than-expected deterioration in corporate sentiment in both Germany and France, the euro zone’s two biggest economies, reflected an abrupt downturn in sentiment across the broader European single currency area.

In Germany, the Ifo economic institute said on Thursday its business climate index fell to its lowest level since January 2006, dropping to 102.4 from 104.8 in March and falling below all forecasts in a Reuters poll of 52 economists.

In France, which together with Germany accounts for roughly half the euro zone’s economic output, business sentiment fell to its lowest level in nearly 1-1/2 years in April.

“The euro zone economy is coming under stress, particularly the more resilient part of the euro zone,” said Bank of America economist Matthew Sharratt, adding that the European Central Bank could moderate its tough tone after the data. ECB policymakers said on Tuesday the bank was prepared to raise interest rates if needed to bring inflation under control, the latest in a run of recent hawkish comments that helped drive the euro to a record high above $1.60 on Tuesday. The euro fell to a one-week low versus the dollar after the Ifo data.

In further evidence of weakness across the region, Dutch business confidence fell in April to its lowest level since the end of 2005, while consumer confidence also slipped. In Belgium, business morale suffered its biggest ever monthly drop. “I don’t think there is going to be any enthusiasm for going into this ‘should we have a rate hike?’ debate,” said Sharratt. “I think this data will certainly put a cap on that.” ECB Governing Council member Michael Bonello said on Thursday it was hard to make a case for higher interest rates although he qualified that by saying his remarks were not intended to reflect the views of all the Council.


“NEGATIVE FORCES”
Ifo economist Klaus Abberger told Reuters companies now expected the global financial crisis to hit the real economy. “Negative forces from the high oil price, the euro and the financial crisis are starting to have an effect,” he said. German chipmaker Infineon said on Wednesday it would miss its profitability target for 2008/09 if the dollar did not recover from recent lows versus the European currency. A separate Ifo gauge of current conditions fell to 108.4 in April from 111.5 the previous month. A reading of 111.0 had been forecast. “Future worries have now become present worries,” Sharratt said of the fall in the Ifo current conditions component. The survey’s expectations component dropped to 96.8 from 98.4 in March and compared with a median forecast of 98.0.

The expectations reading was the weakest since August 2005. “The decline of the Ifo index should wake up all decoupling believers who over the last months steadily advocated that the German economy had been able to shrug off the financial crisis and the US slowdown,” said ING economist Carsten Brzeski. “Unfortunately, paradise only exists in fairy tales.”

French statistics office INSEE’s business confidence index fell to its lowest level since December 2006. “According to business chiefs surveyed in April, the industrial situation has worsened,” INSEE said. French companies have also been feeling the impact of the strong euro.

Essilor International, the world’s largest spectacles maker, said on Wednesday the dollar’s weakness against the euro had had a negative effect. “In the first quarter, currencies had a very significant negative impact on the recorded number of our turnover,” Essilor CEO Philippe Alfroid said. And in another sign that the global slowdown and euro strength are beginning to hurt the euro zone economy, a manufacturing survey of the currency bloc released on Wednesday showed both new orders and new export orders shrinking for the first time since May 2005. (Reuters)

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