BERLIN German business sentiment in April was worse than the most pessimistic of forecasts, falling for the second consecutive month as Europe's largest economy was undermined by both its euro zone and Chinese export markets.
Munich-based Ifo think tank said on Wednesday its business climate index, based on a survey of some 7,000 firms, fell to 104.4 in April from 106.7 in March.
It came a day after a preliminary purchasing managers' survey showed Germany's private sector contracted in April, bolstering the case for the European Central Bank to cut interest rates at its meeting next week.
The Ifo report pushed the euro down to its lowest in nearly three weeks against the dollar while Bunds edged up briefly.
"The sharp dip in Germany's Ifo index marks another nail in the coffin for stronger recovery this year," said David Brown at New View Economics. "Germany will be very lucky to avoid a near term recession in the recent two quarters."
The German economy long fought off the euro zone crisis that sent much of the rest of the bloc into recession but contracted in the final quarter of 2012. Data now point to it struggling to leave that gloom behind, especially because of weakness in the Chinese economy which had proved a strong alternative market.
The economy has not yet featured prominently in Germany's election campaign but if it worsens significantly it could become a headache for Chancellor Angela Merkel as she seeks a third term in office in September.
Momentum meanwhile is growing at the ECB for a cut. The bank's own lending data on Wednesday added to the pressure, showing demand for corporate and household loans in the euro zone plummeted in the first three months of the year.
Lower interest rates could help German exports and therefore the wider euro zone by weakening the euro, which has already fallen around 1.5 percent against the dollar since the start of the year.
Some other recent data have been more mixed. Industrial orders climbed in February while output ticked up and exports fell. Unemployment has edged up but remains close to a German post-reunification low and retail sales have risen.
Economists polled by Reuters expect Germany to stave off recession by growing 0.3 percent in the first quarter. Ifo economist Klaus Wohlrabe said Germany should grow more strongly in the second quarter of 2013 than in the first.
But announcements from German firms have been largely downbeat, with BASF (BASFn.DE) saying it would cut 500 jobs by 2015, Bosch ROBG.UL saying sales were subdued between January and March and Daimler (DAIGn.DE) reporting its first-quarter profit plunged more than half.
The Ifo survey showed firms were more gloomy about their business outlook, with a sub-index falling to 101.6 from 103.6 in March. They were more pessimistic about current business, with a gauge of current conditions dropping to 107.2 from 109.9.
German engineering conglomerate Siemens (SIEGn.DE) said earlier this month that while Chinese industrial demand seemed to be stabilizing it did not expect a notable recovery in the next two quarters.
"In good times, the global economy would have helped but in the second quarter there has been no good news from emerging markets," said Andreas Scheuerle, an economist at Dekabank, pointing to slowing Chinese growth, trouble in North Korea and weak early indicators in the United States.
"No wonder that companies have lost their hopes for a dynamic recovery," he added.
The weakness in foreign trade, traditionally the driver of growth in Germany, means it has to rely more on its consumers to prop up growth this year. But in a worrying sign for domestic demand, Ifo said retailers were more pessimistic about business prospects.
(Reporting by Berlin bureau; Writing by Michelle Martin; Editing by Stephen Brown/Jeremy Gaunt)