Germany leads drop in euro zone business sentiment

By Paul Carrel

BERLIN (Reuters) - German and French business morale fell sharply in April, depressed by a cocktail of high oil prices, a strong euro and market turmoil, and raising questions about whether the ECB will keep up its hawkish tone.

The stronger-than-expected deterioration in corporate sentiment in Germany and France, the euro zone's two biggest economies, reflected an abrupt downturn in sentiment across the broader common currency area.

In Germany, the Ifo economic institute said on Thursday its business climate index hit its lowest level since January 2006, dropping to 102.4 from 104.8 in March and falling below all forecasts in a Reuters poll of 52 economists ECONDE.

In France, which together with Germany accounts for roughly half the euro zone's economic output, business sentiment fell to its lowest level in nearly 1-1/2 years in April.

"The euro zone economy is coming under stress, particularly the more resilient part of the euro zone," said Bank of America economist Matthew Sharratt, adding that the European Central Bank could moderate its tough tone after the data.

ECB policymakers said on Tuesday the bank was prepared to raise interest rates if needed to bring inflation under control, the latest in a series of hawkish comments that helped to drive the euro EUR= to a record high above $1.60 on Tuesday.

The euro dropped to a one-week low versus the dollar after the Ifo data. Stocks also fell, while safe-haven bunds EU10YT=RR rose.

In further evidence of weakness across the region, Dutch business confidence fell in April to its lowest level since the end of 2005, while consumer confidence also slipped. In Belgium, business morale suffered its biggest ever monthly drop.

"I don't think there is going to be any enthusiasm for going into this 'should we have a rate hike?' debate," said Sharratt. "I think this data will certainly put a cap on that."

ECB Governing Council member Michael Bonello said on Thursday it was hard to make a case for higher interest rates, although he qualified this by saying his remarks were not intended to reflect the views of all the Council.

German Economy Minister Michael Glos urged the ECB not to pursue a policy that could make the euro appreciate further. "The European Central Bank must make sure an interest rate increase does not lead to exchange rates moving again to the disadvantage of the dollar and the advantage of the euro, which of course would not be good for our export industry," he said.

NEGATIVE FORCES

Ifo economist Klaus Abberger said companies now expected the global financial crisis to hit the real economy. "Negative forces from the high oil price, the euro and the financial crisis are starting to have an effect," he told Reuters.

German chipmaker Infineon (IFXGn.DE) said on Wednesday it would miss its profitability target for 2008/09 if the dollar did not recover from recent lows versus the European currency.

In another sign the global slowdown and strong euro are hurting the euro zone economy, a manufacturing survey of the currency bloc released on Wednesday showed both new orders and new export orders shrinking for the first time since May 2005.