FRANKFURT — Business confidence in Germany dropped for the first time in seven months in May, as companies become increasingly spooked by the long-running eurozone debt crisis, data showed Thursday.
The Ifo economic institute said its closely watched business climate index dropped to 106.9 points in May from 109.9 points in April.
The reading was much worse than expected: analysts had been pencilling in only a very modest decline in the index this month.
The drop brings to an end a six-month rally in business confidence in the Europe’s biggest economy. It was the steepest drop since August last year and brought the barometer down to its lowest level since November 2011.
“The Ifo index fell sharply in May. The recent surge in uncertainty in the eurozone is impacting the German economy,” said Ifo president Hans-Werner Sinn.
“Assessments of the current business situation deteriorated clearly and companies also expressed greater pessimism about their business outlook.”
For its survey, Ifo quizzes around 7,000 companies about their current business situation and the outlook for the next six months, with 100 being the long-term average.
Ifo said the outlook sub-index tumbled to 100.9 points in May from 102.7 points in April and the sub-index measuring current business slumped to 113.3 points, it lowest level since July 2010.
ING Belgium economist Carsten Brzeski saw the data as a sign of a “new realism” on the part of German businesses.
“For last couple of months, it had seemed that the Ifo index painted a too positive growth picture. Today’s Ifo reading has corrected this picture in one fell swoop,” Brzeski said.
“German businesses have woken up to reality: islands of happiness might exist, economic islands within the eurozone hardly,” he said.
The Ifo data were released at the same time as a key eurozone confidence index, the Purchasing Managers Index (PMI) compiled by the London-based research firm Markit, which suffered its worst monthly slide in nearly three years in May.
Both sets of data “depict a very gloomy outlook for future activity in the euro area in the second quarter,” said Newedge Strategy analyst Annalisa Piazza.
She saw “signs of panic” in the Ifo data.
“This is a sign that the Germany economy is suffering from the current uncertainties” after all and “risks for future activity are skewed to the downside,” the analyst said.
Christian Schulz at Berenberg Bank similarly saw the Ifo data as as sign that “the renewed euro crisis around the Greek elections now seems to be reaching the German real economy.”
Nevertheless, the index “index suggests continued growth, albeit at a much lower level than recently,” he said.
Earlier, the national statistics office, Destatis, published data confirming that gross domestic product (GDP) grew by 0.5 percent in the first three months of this year, fuelled by robust exports and consumer demand.
Postbank economist Heinrich Bayer agreed that the latest sentiment indicators “suggest that, following the positive start into the year, the German economy is losing momentum.” — AFP