Crisis of Confidence

In the latest batch of bad news for European growth, already nervous because of the spreading global financial crisis, the Munich-based economic research institute Ifo's monthly business climate index dropped to 102.4 points in April. The index is considered the most reliable barometer of the current state of the German economy and its outlook.

The news this week that the value of the euro, a catalyst for the current slump, hit a new high of US$1.6018 on Tuesday, prompted business leaders to call the European single currency's surge "alarming." The value of the euro tailed off on the news from various European confidence indexes released on Thursday.

Referring to the decline in German confidence, Ifo chief Hans-Werner Sinn told reporters that the mood had gotten darker in the German manufacturing, wholesale and retail sectors in particular.

The business expectations sub-index, which measures the outlook for the next six months, declined to an indexed 96.8 points from 98.4 points in March while the business assessment index, which covers current conditions, dropped 108.4 points from 111.5 last month.

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

Business confidence slumping across Europe

The news from Ifo is the latest in a string of recent surveys which show business confidence weakening across Europe, particularly in the manufacturing sector as it increasingly struggles to cope with a strong euro, record oil prices and easing global demand.

"With the set of lead indicators for the euro area almost complete, we believe that sentiment in the euro area has weakened markedly," UBS European economist Sunil Kapadia told reporters. "Over the past few days, business confidence surveys have surprised on the low side in all the major euro area countries," he added.

Announced at the same time as the German slump, a survey in France showed that business confidence was also deteriorating more than expected. Confidence in the French industrial sector also soured more than expected in April, falling to the lowest point since December 2006, a survey by France's INSEE statistics office showed.

Retreating confidence in Germany and France came on the heels of a drop in Belgian business confidence, which economists see as a bellwether for broader European sentiment despite the country's diminutive size.

Those indicators put the final strokes on an emerging picture of gloom after a survey on Wednesday of euro-zone purchasing managers' confidence levels for the manufacturing sector fell to a 32-month low.

"The message coming from the release of the business confidence indicators is unanimous across the main euro-area countries," economist Lavinia Santovetti of Lehman Brothers said.

"At the start of the second quarter the outlook for the manufacturing sector has deteriorated substantially," she added. "In addition to the continued deterioration of the international environment, surging oil prices, the strong euro and slowing world demand probably explain these developments."

Crisis to deepen before any upturn is expected

The situation in Germany is likely to get worse before it gets better. "After a brief brightening at the beginning of the year, the survey results indicate a slower pace of business activity," Ifo chief Sinn said. "The forces of a slowdown evident since mid-2007 have gained strength again."

Analysts from Commerzbank issued a written report that warned that the economy could expect to take further hits. "The economy can be expected to lose further momentum over the coming months, for a number of reasons," they wrote.

"Exports will no doubt be hit by the stronger euro and weaker economic performance throughout western Europe, and domestic demand is being eroded by high energy and food prices."

German government reduces expansion forecast

Germany's Economy Minister Michael Glos unveiled the government's economic growth forecast for next year, indicating the rate of expansion would decline to 1.2 percent in 2009 from 1.7 percent this year.

Germany's six leading economic institutes said in a report last week that they expected growth in 2009 of 1.4 percent.

The German economy had long seemed surprisingly resilient despite the slowdown in the United States, the international credit squeeze and a strong euro. But recent indicators and data suggest such factors are beginning to take a toll.

The biggest European carmaker, Volkswagen, said on Thursday that its business was suffering because of the rise of the euro against the dollar.

Meanwhile rising energy and food prices also remain a concern, with Germany's annual inflation rate hitting 3.1 percent in March, well above the European Central Bank's target of below 2.0 percent.

Data released last week showed a 4.2-percent jump in producer prices.

Hopes for an ECB bail-out

An analyst at Capital Economics, Jennifer McKeown, held out the prospect that the gloom might prompt the European Central Bank to lower interest rates.

"The headline business climate index is still well above its long-run average of 96.5, suggesting that the slowdown in economic activity should not be too sharp," she said in an interview with the AFP news agency.

"Nonetheless, it might not be too long before further falls in business confidence turn the ECB's attention from upside inflation risks to slowing growth."