UPDATE 2-Geopolitical crises help push German business morale to lowest since Oct

Fri Jul 25, 2014 5:42am EDT

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By Michelle Martin

BERLIN, July 25 (Reuters) - German business sentiment fell to its lowest level in nine months in July, adding to signs that Europe's largest economy is slowing and suggesting that firms are worried about the crises in Ukraine, Iraq and Gaza.

The Munich-based Ifo think tank's business climate index, based on a survey conducted from July 4 to 24 on some 7,000 companies, fell to 108.0 from 109.7, with Ifo saying geopolitical tensions had weighed on confidence.

It was the lowest reading since October and undershot all forecasts in a Reuters poll of economists, helping send the euro to a session-low against the dollar.

"The conflict stoked by Russia's President (Vladimir) Putin in eastern Ukraine has a strong effect on the German economy," said Christian Schulz, senior economist at Berenberg Bank. He added that the weakness could continue through the summer given that the Ukraine crisis is yet to abate.

More than 6,000 German firms are active in Ukraine and some are worried that tensions there will take their toll on business. Firms' expectations for the next six months were at their lowest level in almost a year, the Ifo survey showed.

German exports to Russia dropped by 14 percent in the first four months of the year, and Eckhard Cordes of the Committee on Eastern European Economic Relations has warned that the decline in trade puts some 25,000 jobs at risk in Germany.

Nevertheless, on Friday Cordes came out in support of tougher action if Putin fails to help stabilise the situation in Ukraine. EU ambassadors on Thursday discussed ways to curb Russian access to capital markets, arms and energy technology in response to last week's downing of a Malaysian airliner in an area of eastern Ukraine held by Russian-backed separatists.

FIRMS NERVOUS, CONSUMERS UPBEAT

Schulz said Germany was the best-placed country in Europe to deal with the effects of the Ukraine crisis.

"Rising household incomes boost potential consumer demand, and recovering global demand growth should easily offset the weakness in trade with Russia," he said.

Earlier on Friday a survey by GfK showed German consumer morale rose to its highest level in more than 7-1/2 years heading into August, with shoppers more upbeat about their future income prospects than at any point since 1991.

But the Ifo survey showed firms at their most downbeat about the current situation since January. During the time the survey was conducted Israel launched an offensive against Islamist militants in Gaza, a Malaysia Airlines plane was downed over Ukraine and sectarian tensions raged in Iraq.

"The effect of the tensions in Ukraine and the Middle East on the global economy is still unclear but they are certainly contributing to uncertainty among companies," said Joerg Zeuner, chief economist at KfW.

"If the situation calms again, growth rates could pick up again after a breather in the second quarter but it's questionable if good growth this year - we're expecting around 2 percent - can be repeated again in 2015," he added.

The German economy grew at its strongest rate in three years in the first quarter largely due to mild weather boosting construction, but economists generally expect it to be weaker in the second quarter before picking up in the third.

Recent hard backward-looking data has been subdued, with industrial output, orders, exports and imports all falling. Investor sentiment has also taken a turn for the worse, though the private sector has grown. (Additional reporting by Stephen Brown and Alexandra Hudson in Berlin and Joern Poltz in Munich; Writing by Michelle Martin; Editing by Hugh Lawson)

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