29 October 2002, 09:26  European Economies: German Business Confidence Drops

/www.bloomberg.com/ By Christian Baumgaertel
Munich, Oct. 28 (Bloomberg) -- German business confidence fell to a nine-month low in October, a survey of 7,000 companies showed, suggesting Europe's largest economy won't pick up soon.
The Ifo institute's index of western German business confidence dropped to 87.7, from 88.2 in September. Manufacturers led the decline. 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 cut their growth forecast by half last week. The benchmark DAX Index has shed 38.8 percent this year. Heidelberger Druckmaschinen AG, the largest maker of printing presses, is paring almost a 10th of its workforce amid the worst advertising slump in a decade.
Government plans to increase taxes and cut spending may reduce growth further, analysts and executives have said. Chancellor Gerhard Schroeder won last month's election by the narrowest margin of any postwar government.
Confidence is waning in Europe and the U.S. Manufacturers in France were probably more pessimistic this month, analysts said in advance of a government report on Wednesday. Optimism among consumers in the U.S. probably declined, economists forecast a report by the Conference Board tomorrow will show.
``They'll point to a weak global economy,'' said Otmar Lang, an economist at Deutsche Bank AG in Frankfurt. ``Interest rate cuts both here and in the U.S. will become necessary.''
Stocks, Notes Rise
Government debt and stocks rose amid expectations that central banks in the U.S. and Europe may lower interest rates before the year's end. The yield on the 3 1/4 percent German note due in 2004 fell 7 basis points to 3.15 percent.
The DAX, which was the second-worst performing benchmark stock index in the world last quarter, rose 1.9 percent today to 3113.2 at 5:17 p.m. Frankfurt time.
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.
Confidence improved among retailers, wholesalers and construction companies, today's survey showed. ``We don't see the danger of a double dip,'' said Gernot Nerb, an Ifo economist.
Struggling to Grow
The economy grew 0.3 percent in the second quarter, the same pace as the first three months of the year, as companies pared investment. Factory orders for capital goods such as machinery and trucks fell in two of the last three months.
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.
``The economy will deteriorate further,'' said Juergen Wunner, who helps manage 100 million euros ($97.4 million) in stocks at Bank Julius Baer in Frankfurt. ``Sentiment in the U.S. has clouded over and the tax increases by the government won't boost consumption.''
German banks are struggling to be profitable as corporate insolvencies climb to record levels, stocks tumble and economic growth stagnates. Lenders have taken steps to eliminate more than 40,000 jobs since the start of last year. Deutsche Bank, the country's biggest bank, is shedding about 14,470 positions.
General Electric Co. and Microsoft Corp. have a combined market value that's bigger than the top 100 German companies, according to Merrill Lynch & Co.
Interest Rates
The European Central 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 Fed pared its overnight lending rate 11 times last year to a 41-year low of 1.75 percent. The Bank of England reduced its benchmark rate seven times to 4 percent, the lowest level in 38 years.
The ``recovery process remains intact, but it's not dynamic and is not accelerating in a noticeable way,'' ECB council member and Bundesbank President Ernst Welteke said Friday.
The implied yield on the three-month Euribor interest rate futures contract due in December fell 2 basis points to 3.07 percent. The yield on the March contract declined 6 basis points to 2.92 percent. A basis point is 0.01 percentage point.
``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.

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