(Adds analysis and background)
By Michelle Martin
BERLIN, July 25 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)