German Business Confidence Slumps to Dramatic 2.5 Year Low

The closely-watched Ifo business confidence index fell to 101.3 points this month from 103.5 points in May as a weak dollar, surging inflation, soaring oil prices and slowing growth led to a darkening mood in the boardrooms of Europe's biggest economy.

Economists had forecast that the monthly index drawn up by the Munich-based Ifo economic institute would slip to 102.3 points as a result, highlighting the dilemma facing the European Central Bank as it moves to screw down on inflation when growth is losing momentum.

Based on a survey of 7,000 German executives, the June Ifo report could set the stage for the release this week of a raft of major economic sentiment surveys, which are likely to point to a bleaker outlook taking shape across Europe.

"The firms have assessed their current business situation clearly less favorably than in the previous month, and they are more skeptical regarding the six-month outlook," said Ifo chief Hans- Werner Sinn releasing the survey.

Oil prices weighing heavily on economy

"The sharp hike in oil prices is evidently becoming an increasing burden on the German economy," he said with the nation's executives growing pessimistic both about the current business climate and their expectations six months down the track.

German consumer concerns about the increasing economic uncertainty and a pickup in inflation chipping away at purchasing power are likely to lead to consumer confidence in the nation coming under pressure; a survey to be released Tuesday is forecast to say.

While the component of the Ifo survey measuring the current business climate fell to 108.3 from 110.1, the index's gauge measuring expectations dropped to 94.7 from 97.2.

In the meantime, the Ifo survey showed the mood in Germany's key manufacturing sector worsened significantly this month.

But while manufacturers responding to the survey said they expected their exports to hold up in the face of the strong euro, the Ifo report points to them keeping a lid on business costs, consequently slowing the pace of employment.

Positive export figures keep Germany looking up

Powered by strong demand from the world's leading emerging economic nations in Asia and Eastern Europe, Germany's still-positive export outlook has helped to result in economists revising up their 2008 German growth outlooks.

Instead of a previously projected 1.9 per cent, Germany's central bank the Bundesbank now expects the country to clock up a 2.25 per cent growth rate this year.

This came in the wake of a solid start to the year with the nation's growth rate in the first three months of the year hitting almost a 12-year high of 1.5 per cent quarter on quarter. The German economy grew by 2.5 per cent in 2007.

But German growth is likely to loose ground in the run-up to the end of the year with the nation's expansion rate tipped to slow in 2009.

ECB planning nasty surprises

The latest Ifo survey, however, also comes as part of the buildup to next week's ECB meeting with bank chief Jean-Claude Trichet having placed investors on notice that the Frankfurt-based bank was likely to hike rates by 25-basis points to ward off inflationary pressures.

Data to be released on Thursday is forecast to show German inflation creeping up to 3.2 per cent in June, as a result increasing the chances of the ECB delivering its first rate hike in more than a year at its next meeting set down for July 3.

Another rise in German inflation could help to result in consumer prices in the euro zone gaining ground again in June. Annual euro zone inflation climbed to a 16-year high of 3.7 per cent in May.