German Business Confidence Falls to Three-Year Low

By Simone Meier

Sept. 24 (Bloomberg) -- German business confidence declined more than expected to the lowest level in more than three years in September as the worsening financial crisis in the U.S. damped the outlook for global economic growth.

The Munich-based Ifo institute's business climate index, based on a survey of 7,000 executives, fell to 92.9 from 94.8 in August. Economists expected a drop to 94.3, the median of 41 forecasts in a Bloomberg News survey showed.

Germany's economy, which shrank in the second quarter, is showing few signs of recovery after the yearlong credit squeeze led to bankruptcy and bailouts on Wall Street. The impact on economic growth may be mitigated by oil prices and the euro retreating from records.

``The crisis is a reason for concern,'' said Andreas Scheuerle, an economist at Dekabank in Frankfurt. ``We're facing an extremely difficult time with growth rates around stagnation or possibly even worse.''

French business confidence dropped to the lowest level in five years in September and in Italy it fell to the lowest since October 2001 as the global economic slowdown dimmed the outlook.

Worsening Crisis

``The time has come to lower interest rates,'' said Gernot Nerb, an economist at Ifo. ``That doesn't have to happen next week, but the signal should soon come that rates will fall in the next few months.''

The European Central Bank kept its key rate at 4.25 percent for a second month on Sept. 4, suggesting it's more concerned about faster inflation than slowing growth. President Jean-Claude Trichet said that day he still expects the current ``episode of weak activity'' to be followed by a ``gradual recovery.''

The Essen-based RWI research institute lowered its outlook for German growth next year to 0.7 percent last week citing weaker export demand and inflation. In June, RWI forecast expansion of 1.5 percent, saying the economy would weather the worst of the U.S. subprime mortgage crisis. RWI also reduced its growth outlook for this year to 1.7 percent from 2.2 percent.

Second quarter gross domestic product fell 0.5 percent.

The German economy may struggle to return to growth in the second half because of the credit crisis. Central banks around the world have injected cash into the financial system after Lehman Brothers Holdings Inc. filed for bankruptcy protection last week and U.S. authorities bailed out American International Group Inc.

Writedowns

Financial institutions worldwide have reported more than $520 billion in losses and writedowns since the lending crisis started. In Germany, the DAX stock benchmark has shed more than a fifth of its value this year.

Josef Ackermann, chief executive officer of Deutsche Bank AG, Germany's largest bank, said before the Lehman Brothers failure that financial markets remain ``extremely nervous.'' An economic slowdown ``could lead to the next phase of difficulties for financial markets,'' he said.

``The world now faces the prospect of a global economic downturn and inevitably, these shocks are taking their toll on the euro-area economy,'' European Union Economic Affairs Commissioner Joaquin Almunia said on Sept. 22.

In the economy of the 15 euro nations, manufacturing and services contracted for a fourth month in September. The European Commission cut its euro-region growth forecast for this year on Sept. 10 to 1.3 percent from 1.7 percent.

Not Good

``The situation doesn't look good,'' said Alexander Koch, an economist at UniCredit Markets & Investment Banking in Munich. ``Another decline in German gross domestic product seems increasingly likely in the third quarter.''

Continental AG, the German tire maker that's being taken over by Schaeffler Group, cut its profit target for fiscal 2008 earlier this month, citing a worsening outlook for sales as economic growth slows. Rising raw-material prices curbed demand in the third quarter, the Hanover-based company said.

While crude oil prices have retreated 27 percent from a July 11 record, they're still up more than 30 percent over the past year. The euro has depreciated 6 percent against the dollar over the past two months. It's up 4.3 percent from a year ago.

Still, German investor confidence rose for a second month in September after oil prices and the euro declined and unemployment fell more than economists expected in August, pushing the jobless rate to the lowest level in 16 years.

Lanxess AG, Germany's largest publicly traded specialty- chemicals maker, said on Sept. 17 it will meet its full-year profit goals as faster growth in Asian economies compensates for the U.S. slowdown. The third quarter is ``going well,'' Lanxess Chief Executive Officer Axel Heitmann said.

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