German business confidence declined to the lowest level in more than five years in October as the deepening financial crisis dimmed the outlook for economic growth.
The Munich-based Ifo institute said its business climate index, based on a survey of 7,000 executives, fell to 90.2 from 92.9 in September. Economists expected a drop to 91, the median of 23 forecasts in a Bloomberg News survey showed.
The German economy is struggling to recover from a second-quarter contraction after the global financial crisis froze credit markets, sapped consumer spending and damped demand for European exports. Stocks tumbled around the world last week on concern an economic slump will damage earnings.
"The financial-market crisis has spooked German companies because they worry that the economies in their main export markets are collapsing," said Andreas Scheuerle, an economist at Frankfurt-based Dekabank. "They can't expect the domestic economy to offset the decline in exports." Germany's leading economic institutes this month slashed their joint forecast for growth in Europe's biggest economy next year, forecasting expansion of just 0.2 percent.
Investors are betting the European Central Bank will follow its emergency interest-rate cut on Oct 8 with another half-point reduction on Nov 6, Eonia forward contracts show. The ECB's benchmark lending rate currently stands at 3.75 percent. ECB President Jean-Claude Trichet may comment on the bank's intentions when he speaks at an event in Madrid at 2:55 pm yesterday.
Dramatic worsening
Financial institutions worldwide have reported more than $660 billion in losses and writedowns since the US housing slump triggered the credit crisis last year. Lending between commercial banks ran dry after Lehman Brothers Holdings Inc filed for bankruptcy on Sept 15, sending borrowing costs to records as confidence waned.
The "dramatic worsening of the financial crisis since the collapse of Lehman Brothers radically modified the outlook for growth" and "our assessment of risks to price stability as well," ECB council member Guy Quaden said last week.
The euro has dropped 16 percent in the past month to $1.2367 yesterday, the lowest in more than two years, as Europe's economic outlook deteriorates and the likelihood of further rate reductions increases.
While a weaker currency makes exports more competitive, "it doesn't help if global demand crashes at the same time," said Stefan Muetze, an economist at Helaba Invest GmbH in Frankfurt.
Exports from Germany unexpectedly fell for a second month in August and investor confidence dropped for the first time in three months in October, to near a record low.
Daimler AG, the world's second-biggest maker of luxury cars, last week cut its forecast for full-year earnings by 1 billion euros as the worldwide credit crisis restricts consumers' access to loans. Rheinmetall AG, a German maker of car parts and military equipment, lowered its 2008 earnings outlook on Oct 23 because of a drop in car-component orders. The German parliament on Oct 17 approved the government's rescue plan for the country's financial institutions.
Source: China Daily/Agencies
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