28 October 2002, 13:03   German Business Confidence Fell in October, Ifo Says

Munich, Oct. 28 (Bloomberg) -- German business confidence fell to a nine-month low in October, a survey of 7,000 companies showed, suggesting growth in Europe's largest economy won't pick up soon. The Ifo institute's index of western German business confidence fell to 87.7 from 88.2 in September. Analysts forecast a reading of 88. A separate index of executives' expectations for future business dropped to 97.9 from 99.3.
``Next year will be another big step backward,'' said Brian Protiva, chief executive officer of Adva AG Optical Networking, a maker of phone equipment for companies including BT Group Plc and France Telecom SA. Clients ``have become real penny-pinchers,'' he added. Germany's six largest economic research institutes last week more than halved their growth forecast. The benchmark DAX Index has declined 38 percent this year. Heidelberger Druckmaschinen AG, the world's biggest maker of printing presses, is paring almost a 10th of its workers amid the worst advertising slump in a decade.
Government plans to raise taxes and cut spending may cut growth further, analysts and executives have said. Chancellor Gerhard Schroeder won last month's election by the narrowest margin of any postwar government. ``This may have played a role,'' in the confidence drop, said Gernot Nerb, an economist at Ifo. Half the responses to the survey were received after the government said it will scrap tax breaks and raise pension contributions.
Munich-based Ifo, which gets some of its money from the government, each month asks executives about production, orders, inventories and employment. The index peaked at 107.3 in November 1990. The low was 75.7 in 1982. Business confidence is also waning in the U.K. and Italy. Government debt remained higher after the survey was released. The yield on the 3 1/4 percent German note due in 2004 declined 6 basis points to 3.16 percent. A basis point is 0.01 percentage point.
The U.S. economy, destination of about a fifth of Europe's exports, is struggling to gain momentum. Orders for durable goods and confidence among consumers declined. The Federal Reserve said economic growth was slow entering this quarter because of stalled manufacturing, flattening retail sales and lackluster hiring. Exports account for about a third of Germany's economy. The ``recovery process remains intact, but it's not dynamic and is not accelerating in a noticeable way,'' Bundesbank President and European Central Bank council member Ernst Welteke said Friday.
ECB Under Pressure
The ECB is under pressure from politicians including Finance Minister Hans Eichel and executives including Siemens AG Chief Financial Officer Heinz-Joachim Neubuerger to cut interest rates. The bank kept its benchmark lending rate at a 2 1/2-year low of 3.25 percent at its last meeting on Oct. 10. Policy makers lowered borrowing costs four times last year.
The implied yield on the three-month Euribor interest rate futures contract due in December dropped 3 basis points today to 3.06 percent. The March contract yielded 2.93 percent. ``It's totally clear that now is the right time to cut interest rates,'' Austrian Chancellor Wolfgang Schuessel said last week. ``It's unthinkable that that move won't occur.''
The European Commission pared its growth forecast for the region five times this year and now predicts the slowest rate of expansion in a decade. The dozen nations sharing the euro grew 0.4 percent in the second quarter, the same as in the first. //www.quote.bloomberg.com

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