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Dhaka Tribune

Fall in German confidence adds to eurozone woes

Update : 25 Apr 2013, 12:01 PM

Evidence that the eurozone's most powerful economy is being dragged towards recession intensified on Wednesday (24APR) after a key index of German business sentiment fell for the second consecutive month.

The Munich-based IFO thinktank said businesses blamed falls in exports to the rest of the eurozone and a lacklustre Chinese market for the sharp decline in its business climate index. The index, which is based on a survey of around 7,000 firms, fell to 104.4 in April from 106.7 in March.

A string of announcements from German firms added to the weakening picture, with Bosch saying sales were subdued between January and March and Daimler reporting its first-quarter profit plunged more than half.

Daimler, the maker of Mercedes-Benz luxury cars, reported a fall in profits to EUR564m from EUR1.42bn in the same quarter a year ago. Revenue was down 3% at EUR26.1bn.

The car firm has survived the euro crisis relatively unscathed following bumper sales of high-end models to the burgeoning super rich in China and other parts of Asia.

But the severity of the recession in many parts of Europe has triggered a dramatic decline in car sales over recent months, while China has failed to expand at its previous gallop.

Daimler boss Dieter Zetsche said: "many markets developed worse than expected for economic reasons, especially in Western Europe."

The IFO report, which came a day after an equally gloomy survey of German manufacturers, pushed the euro down to its lowest level in nearly three weeks against the dollar. The yield on German government bonds, an indicator of the interest rate Germany pays to borrow on the international money markets, edged up.

"The sharp dip in Germany's IFO index marks another nail in the coffin for stronger recovery this year," David Brown at New View Economics told Reuters. "Germany will be very lucky to avoid a near term recession in the recent two quarters."

The downturn in Germany has raised pressure on the ECB to cut interest rates. The central bank's own lending data showed demand for corporate and household loans in the eurozone plummeted in the first three months of the year.

Consumer credit demand declined by a quarter compared with a 14% fall in the last three months of 2012.

German households have gained a reputation for restrained spending, forcing companies to look at export markets for growth. A downturn in consumer borrowing is likely to heap further pressure on German companies to find profitable export markets.

However, German engineering conglomerate Siemens said earlier this month that while Chinese industrial demand seemed to be stabilising it did not expect a notable recovery in the next two quarters.

Graham Turner, an economist at GFC Economics said the persistent weakness in the eurozone's domestic demand was a cause for concern, though it was offset by the unveiling of an ambitious stimulus programme in Portugal and follows last week's announcement from Paris that it would ease deficit reduction plans.

"Germany may be digging in its heels over fiscal policy, despite recording a budget surplus of 0.2% of GDP last year," he said. "Nevertheless, six countries, including Spain, have applied to the European commission for 'permission to roll back on austerity", which could provide some relief if successful against the longer term demand by Brussels and Berlin for annual budget deficits to be reduced below 3%.

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