March 26 (Bloomberg) -- German business confidence fell to a five-month low in March as accelerating global growth failed to ignite consumer spending in Europe's biggest economy.
The Munich-based Ifo institute said its confidence index, based on a survey of 7,000 executives, dropped to 95.4 from 96.4 in February, the second consecutive drop. Economists surveyed by Bloomberg News had expected a reading of 95.7, according to the median of 46 forecasts.
Economic growth in the dozen nations sharing the euro is showing signs of slowing as concern about unemployment and terrorism discourages households from boosting spending. European Central Bank President Jean-Claude Trichet said the bank may pare its growth forecasts unless consumer spending recovers, igniting speculation about an interest-rate cut.
``It seems like the recovery is on something of a knife's edge -- it's not transpiring as we had thought a few months ago,'' said Carsten Klude, head of strategy at Hamburg-based M.M. Warburg, which manages the equivalent of about $19 billion. ``Trichet will carefully examine'' the Ifo report.
Ifo's index measuring future expectations dropped to 98.9 from 100.3, the lowest since September. An index measuring current conditions fell to 92.1 from 92.6. The decline in current conditions is a ``particular concern,'' Ifo President Hans-Werner Sinn said in a statement.
Rate Speculation
Investors expect the ECB to cut rates by the end of June to shore up a recovery, futures trading suggests. The euro's 14 percent increase against the dollar in the past year has also curbed the pace of export demand, which returned the region to growth in the third quarter of last year. The euro held losses after the report and bought $1.2101 at 10:04 a.m. in Frankfurt.
The yield on the three-month Euribor contract for June settlement was at 1.85 percent today, down from 2 percent at the start of March. The money market rate was 1.99 percent, below the ECB's benchmark refinancing rate of 2 percent. The ECB's governing council meets to set rates next Thursday.
``The ECB knows that consumer spending is weak -- if manufacturing starts to crumble, then there's nothing to suggest accelerating growth,'' said Karsten Junius, an economist at Dekabank in Frankfurt and author of a book on the ECB.
Money Growth Slows
The inflation climate gives the bank room to lower rates. Money supply in the euro region grew at the slowest pace at 2 1/2 yeas in February, the ECB said today. M3 money supply, ECB Chief Economist Otmar Issing's preferred barometer of future inflation, grew at an annual pace of 6.3 percent, down from a revised 6.5 percent in January.
The terrorist bombings in Madrid this month contributed to the biggest decline in German investor and analyst confidence for 16 months in March, a report from the ZEW Center for European Economic Research showed last week. Italian consumer confidence held near a 10-year low.
This month alone, Morgan Stanley and J.P. Morgan Chase & Co. and three of the six economic institutes that advise the German government have cut their growth forecasts for this year.
Bundesbank President Ernst Welteke said in an interview on Wednesday that risks to the economy have risen since the start of the year, amid the euro's climb to a record last month, stagnating consumer spending and higher oil prices.
Government Forecast
``We expect the dollar to be more of a burden for the German economy than we thought'' at the start of the year, said Anton Boerner, the president of the BGA exporters' group.
Germany's government is sticking to its growth forecast of between 1.5 percent and 2 percent for this year, Economics and Labor Minister Wolfgang Clement said this week. Relatively high interest rates in Europe are putting a drag on growth, he said.
Germany's rebound from a recession in the first half of last year is being driven by global demand. Exports account for about one third of the nation's economy.
SAP AG, the world's largest maker of business management software, said last week orders in the U.S. look ``very good'' compared with a year earlier. Bayerische Motoren Werke AG, the world's second-largest luxury carmaker, expects to report record earnings this year.
``The recovery process has started, but the tempo has become more leisurely,'' said Ralph Wiechers, chief economist at the VDMA machinery industry group in Frankfurt. ``Many executives don't feel the recovery'' in their business.
Unemployment Concern
Rising unemployment is making Germans reluctant to avail of the lowest interest rates since 1876 and $19 billion worth of tax cuts introduced by Chancellor Gerhard Schroeder. KarstadtQuelle AG, Germany's largest department-store operator, said this week that first-quarter sales may decline.
``Should our expectations for stronger private household consumption and domestic demand as a whole not be fulfilled, we would change our forecasts accordingly,'' said Trichet in an interview with German daily Handelsblatt published Wednesday.
German household spending dropped last year and unemployment rose to 10.3 percent in February as companies including Thomas Cook AG, Europe's second-largest tour operator, and Volkswagen AG, Europe's largest carmaker, cut jobs.
Schroeder and Trichet can't rely on businesses to step up hiring in Germany before the second half of the year. Germany is the only European country where companies plan to cut rather than increase staffing in the second quarter, a survey of 10,000 business published last week by Manpower Inc. showed.
Hanover-based Continental AG, the world's fourth-largest tiremaker, said last week it plans to build a new factory in Brazil and expand an existing joint venture in Malaysia as it shifts production to low-wage countries. Germany has the world's highest labor costs, according to the IW economic institute.
``The revival of global demand is helping Europe, but we need a revival of domestic demand,'' Gertrude Tumpel-Gugerell, one of six members of the ECB's executive board, said in an interview published yesterday.
German Business Confidence Declines to Five-Month Low
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26-03-2004 01:22
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