German business sentiment falls unexpectedly as financial crisis weighs heavily on economy

BERLIN – Business confidence in Germany dropped for the sixth month in a row, a closely watched survey showed Wednesday, amid growing indications the financial crisis is taking an increasing toll on Europe's largest economy.

Munich's Ifo institute said its key business climate figure dropped to 100 in October from 101.4 in September. Economists had been predicting a slight increase to 101.6, and the euro dropped to a one-week low versus the U.S. dollar of $1.2920 following the report.

Ifo president Hans-Werner Sinn said even though businesses reported that their expectations for the next six months remained unchanged at 93.2 points, their assessment of their current situation dropped sharply from 110.3 points in September to 107.3 in October.

"The clouds over the German economy are darkening," Sinn said.

Germany has been doing better than debt-burdened European countries such as Spain and Italy, but has lost momentum as the debt troubles on its doorstep have weighed on economic confidence.

Germany's economy, which was worth a little under €2.6 trillion ($3.4 trillion) last year, in comparison with the U.S.'s €12 trillion, has seen two consecutive years of robust growth. Its economy expanded by 4.2 percent in 2010 and 3 percent last year.

But the Economy Ministry last week cut its growth forecast for 2013 to 1 percent from 1.6 percent, though increased this year's outlook slightly from 0.7 percent to 0.8 percent. The economy grew 0.3 percent in the second quarter and the ministry said indicators point to "further moderate growth" in the third quarter as well.

ING economist Carsten Brzeski warned, however, that the Ifo survey indicates businesses have growing concerns about the economy and is "clear evidence that recessionary risks in the German economy are increasing."

"The sharp drop in the current assessment component shows that the good times are, at least for now, over," he said in a research note. "The industry's safety net has become very fragile."

Germany's export-driven economy has managed to make up for weakening support from other European Union nations, several of which are in recession, with growth elsewhere including to Russia and China.

It is now, however, feeling not only the problems of the European Union but also elsewhere, Brzeski said.

"The slowdown of the German economy is not only a consequence of the euro crisis, but also of the global economic cooling," he said. "As long as the main economic blocs outside Europe can pick up steam again, Germany should be able to escape the current fate of most of its eurozone peers."

The Ifo index is based on a survey of 2,500 businesses about their views on how the economy is doing and how they see things in the future.