German business sentiment weakened more than expected in June as concern grew among companies in Europe’s largest economy that tensions in Ukraine and Iraq would hurt their business.
The Munich-based Ifo think tank’s business climate index dropped to 109.7 from an unrevised 110.4 in May, marking its second consecutive monthly fall.
Expectations in a poll of 40 economists had been for the index, which is based on a monthly survey of some 7,000 firms, to fall to 110.2.
“The German economy fears the potential impact of the crises in Ukraine and Iraq,” Ifo president Hans-Werner Sinn said in a statement.
German firms have been concerned since early this year about tensions in Ukraine, fearing that tougher sanctions could hurt their business. Iraq’s fight against a Sunni insurgency has pushed up oil prices on fears of potential supply disruptions.
More than 6,000 German companies are active in Russia and business and trade bodies have warned that an escalation in tensions over Ukraine would result in catastrophic losses for firms.
Yesterday, the European Union urged Russia to back president Petro Poroshenko’s peace plan for Ukraine, but its threat of tougher sanctions if Moscow failed to do so appeared to have only partial support.
Global uncertainties are taking their toll,” said economist Holger Schmieding of Berenberg bank. “Germany’s domestic fundamentals remain solid,” he added, pointing to strong employment, low inflation and buoyant construction. “(But) we need to watch the situation in Ukraine, Russia and Iraq carefully.”
Following 0.8 per cent growth in the first three months of the year, the government expects economic growth to slow. It forecasts growth of 1.8 per cent for the year as a whole on the back of strong domestic demand and a healthy jobs market.
Ifo said firms expected their outlook to worsen, with a sub-index dropping to the lowest level since October 2013. They remained confident about current business, with a sub-index on conditions holding steady. The data is likely to keep pressure on the European Central Bank (ECB) to ease policy even further in coming months, especially after data on Monday showed that German manufacturing output increased at its weakest rate since September. Service sector growth also slowed.
Reuters
