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Thursday, July 24, 2008

German Business Confidence Falls Sharply In June

The Ifo institute's German business confidence index dropped 3.7 points from a month earlier to 97.5 in July. This is the lowest in three years, and the biggest one month drop since after the 11 September terrorist attacks. Meanwhile manufacturing and services across the euro area contracted for a second month in July according to the latest PMI flash estimate, with the reading sliding more sharply than expected in July to 47.8 points from 49.3. This was well below expectations which had been for a decline to 48.7, and it was in fact the lowest reading since November 2001.

Ifo indexes measuring current conditions and expectations also fell sharply. The July current conditions index declined to 105.7 from 108.3 in June, below the consensus forecast for a drop to 106.2. The expectations index, which measures sentiment about prospects in the next six months, fell to its lowest level since November 2002, dropping to 90.0 from 94.6 in June, compared to expectations for a drop to 93.3. Thus we have to face the possibility that the eurzone's biggest and most competitive economy may be on edge of a severe and sharp growth slowdown.

IFO themselves draw the following conclusion:

The Ifo Business Climate Index for industry and trade in Germany has fallen again significantly in July following a clear worsening in the previous month. The firms are much more dissatisfied with their current business situation and they are clearly more reserved regarding the six-month outlook. These results suggest that the economic upswing is coming to an end.

In addition Germany's manufacturing sector seems to have put in its weakest performance in nearly three years in July as new orders fell, although growth in the service sector picked upsomewhat. The flash estimate from the Markit purchasing managers index (PMI) for manufacturing dropped to 50.9 from 52.6 in June

On the other hand the services PMI rose to 53.3 in July from 52.1 in June.
Chris Williamson, chief economist at Markit, said manufacturing in Europe's largest economy was at "a virtual standstill", with the index of manufacturing orders slipping to its weakest level in over five years this month.
"Given the order book situation, manufacturing exports and total order books, backlogs of work have fallen for the third month in manufacturing, suggesting there is poor pipeline to drive output in the coming months," he said. "On that basis I would expect output to fall in August and perhaps fall beyond that depending on the exchange rate and oil prices and so forth,"

German manufacturing orders have now fallen for six months in succession, and the Finance Ministry has already said that the economy most probably contracted "considerably" in the second quarter after growth of 1.5 percent in the first three months of 2008.

The decline in German confidence was part of a series of data today suggesting ECB President Jean-Claude Trichet may be too optimistic when he says growth will rebound later this year. Confidence among Italian executives fell to the lowest since 2001 in July, French business sentiment was the weakest since May 2005 and Spanish unemployment in the second quarter rose to the highest rate in 3 1/2 years.

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