German Business Confidence May Fall to Three-Year Low in August

By Simone Meier

Aug. 26 (Bloomberg) -- German business confidence probably fell to a three-year low in August as a recession loomed, a survey of economists shows.

The Ifo institute's business climate index declined to 97.2 from 97.5 in July, according to the median of 35 forecasts in a Bloomberg News survey. That would be the weakest reading since September 2005. Ifo will release the report, based on a survey of 7,000 executives, at 10 a.m. in Munich today.

Germany's economy contracted in the second quarter and may not grow in the third. While oil prices have receded from a record $147.27 a barrel, they're still up 60 percent over the past year, crimping companies' spending power just as the euro's appreciation and the U.S. housing slump weigh on export demand.

``The outlook for production has significantly worsened,'' said Andreas Scheuerle, an economist at Dekabank in Frankfurt. ``The German economy probably shrank in the current quarter, fueling discussion of recession.''

The 0.5 percent contraction in the three months through June was driven by a drop in construction, company investment and consumer spending, another survey of economists shows. The Federal Statistics Office in Wiesbaden will release a detailed report of second-quarter gross domestic product at 8 a.m. today.

The German government forecasts growth of 1.7 percent this year after 2.5 percent in 2007. The Berlin-based BDB banking association said on Aug. 20 that the economy, Europe's largest, may barely expand in the second half of the year.

Food, Clothes, Cars

Arcandor AG, Germany's largest department-store operator, on Aug. 13 reported a loss for the quarter through June and reduced its 2009 earnings forecast. Daimler AG, the world's second-largest luxury carmaker, said Aug. 6 it plans to cut production by 45,000 vehicles by the end of the year. The Stuttgart-based company had already lowered its full-year earnings forecast.

Manufacturing and service industries in the 15-nation euro region contracted for a third straight month in August and confidence in the economic outlook last month dropped the most since the Sept. 11 terrorist attacks in 2001.

``The further development in business confidence will hinge on oil prices,'' said Sylvain Broyer, an economist at Natixis in Frankfurt. ``We may escape a recession in 2008, but the threat for next year is still significant.''

German investor confidence rebounded from an all-time low this month after oil prices and the euro declined.

Oil, Euro

The price of crude has dropped 6.6 percent over the past month to around $114 a barrel. The euro has retreated from an all- time high of $1.6038 on July 15 to $1.4744 yesterday. That's still a gain of 8 percent from a year earlier.

Some companies are benefiting from demand in faster-growing economies in Asia and eastern Europe. Hochtief AG, Germany's largest builder, on Aug. 14 raised its full-year earnings forecasts on increasing demand for construction and mining work in Australia and Asia.

The European Central Bank in July raised its key rate by a quarter point to 4.25 percent to counter inflation even as the economy cools. With the economic outlook deteriorating, investors have pared expectations for further rate increases, Eonia forward contracts show. The yield on the December contract was at 4.22 percent yesterday, down from 4.41 percent a month ago.

To contact the reporter on this story: Simone Meier in Frankfurt at smeier@bloomberg.net