Business Confidence Takes Surprise Tumble

The fall in business confidence was unexpected, and analysts say it reflects the fragile state of Germany's nascent economic recovery. It could also deal a blow to Chancellor Gerhard Schröder just weeks before he faces voters at a general election, in which economic anxieties are expected to play a key role.

The key business climate index compiled monthly by the Ifo economic research institute edged lower to 94.6 points in August from 95.0 in July, it said in a statement.

"Companies are a little disturbed ahead of the election," Ifo said.

The figure fell below analysts' consensus forecast of a slight rise to 95.2 points, helping send stocks lower in Frankfurt. The DAX 30 index was down 1.15 percent at 4,859.60 points in midday trading.

"All in all, the results are not an obstacle to a modest upward trend in the next few months," Ifo president Hans-Werner Sinn nonetheless said in a statement, noting that the fall was slightly more pronounced in eastern Germany.

Independent analysts appeared to agree with Sinn's assessment.

"Today's figures do not amount to a major disappointment," said Sylvain Broyer of banking services group CDC Ixis. "We see the decline in the Ifo number in August as a simple correction after a strong gain."

"This is a disappointment. It shows that Rome wasn't built in a day," Ralph Solveen of Commerzbank told Reuters. "People have frequently heralded growth, but we remain skeptical. However, the second half of 2005 will be better than the first."

The Ifo index had posted a marked rise in July to 95 from 93.3 in June.

Added Jan-Eric Fillieule of CCF: "Disappointment should be tempered, just as excessive optimism should."

Good signs ahead

CCF analysts pointed to "encouraging signs of recovery" in Germany, notably in the areas of exports and business investment.

Ifo chief economist Gernot Nerb said oil prices and uncertainty over the general election, scheduled for Sept. 18, had weighed on business sentiment this month.

On Wednesday, the price of oil hit a record 68.00 dollars per barrel in New York before easing to 67.50 dollars in electronic trade early Thursday.

For its survey, Ifo polls around 7,000 companies about their assessment of current business and their expectations for the next six months.

In July, it appeared that Germany was pulling out of a slump, with two straight months of increases on the Ifo index that the institute had chalked up in part to the euro's fall against the dollar which provided a boost to the country's export-led economy.

Prospect of new government spurs hopes

The chances of a conservative win in the legislative poll had also fueled optimism among business leaders in July, before two deputies raised a legal challenge to the vote.

On Thursday however, Germany's highest court removed the final hurdle to the Sept. 18 vote. The federal constitutional court ruled seven-to-one to reject complaints by two lawmakers who had argued that Chancellor Gerhard Schröder's deliberate loss of a parliamentary no-confidence to bring the poll forward by a year had violated Germany's Basic Law.

Conservative challenger Angela Merkel has said that if her Christian Union bloc is victorious it will focus on cutting unemployment which reached five million earlier this year, the highest level since World War II.

Schröder sought new elections saying he could not continue implementing painful labor market reforms without a fresh pledge of support from the German people.