Economic Slowdown

Along with similar dips reported in Belgium, Italy and the Netherlands, the German business climate index calculated each month by the Munich-based Ifo Institute for Economic Research fell to 104.2 points from 105.8 points in August, the institute said on Tuesday, Sept. 25.

The index had been steadily falling since April and had now hit its lowest level in one and a half years. The latest drop resulted from deteriorations in the survey's current situation and expectations indices.

Commerzbank analyst Ralph Solveen told reporters that the continuing downward trend suggested "a permanent change of course" for the German economy. "We expect the German economy to lose further steam in the coming quarters," he told the news agency AFP.

Analysts predict winter of discontent

Solveen's opinion was echoed by Bank of America economist Holger Schmieding.

"The German economy is heading for a significant slowdown this autumn and winter," he said in an interview with AFP.

In Germany's key manufacturing sector, expectations now "reflect only moderate optimism," Ifo President Hans-Werner Sinn said in a statement. Exporting businesses did not fear strong effects from the euro's rise in value. The shared European currency hit record highs in trading against the dollar this week.

"The manufacturing sector in the euro-zone area is going to get squeezed by some slowing in global demand growth as we go further forward and as well as by the stronger euro," Barclay's Capital economist Julian Callow told Reuters.

Some analysts have also highlighted other factors for the slide including higher payrolls, the increase in commodity prices, fears over the US economy and the current financial market crisis.

A breakdown of the German data showed that the current sentiment sub-index dipped to 109.9 points in September from 111.4 points in August. The expectations sub-index also decreased, falling to 98.7 points from 100.4 points, Ifo said. The business climate in retailing had "markedly worsened," the institute added.

Consumers pull in the purse strings

Global Insight economist Timo Klein was among those who underscored what he called a "rather disappointing sharp drop in retailer sentiment."

"This is not so much related to financial market turmoil, however, instead being caused by the recent spike of food and oil prices that have unsettled consumers about their purchasing power," Klein said.

Schmieding agreed that those factors, along with market uncertainty, "seem to be retarding the long-awaited revival in private consumption." But he stressed that "prospects for a rebound in growth from next spring onwards remain bright."

The German economy is still expected to expand by 2.6 percent this year and 2.2 percent in 2008.

All analysts said the slump in euro-zone growth prospects would make a case for the European Central Bank (ECB) to keep its main interest rate at 4.0 percent despite signs that inflation could rise towards the end of the year.

Schmieding said the ECB would probably start to "tone down" suggestions that rates might rise, while Solveen at Commerzbank forecast lending rates would remain stable in the near future.

"At the end of 2008, the ECB will probably cut interest rates for the first time," he said.