BERLIN, March 26 - The main leading indicator for the German economy unexpectedly dipped in March as uncertainty about the impact of the Iraq war took its toll on companies' view of business prospects. The Ifo institute said on Wednesday its business climate index for western Germany dropped to 88.1 from the February level of 88.9, after two months of rises that had led to tentative forecasts of an end to stagnation in the economy. The index is one of the first sentiment indicators released since the start of the Iraq war last Thursday, but the majority of the 7,000 firms who participated were surveyed on March 5-20 -- before the U.S.-led attack began.
"Around 80 percent of the replies came before the start of the war and around 20 percent afterwards. We had the feeling that the actual start of the war did not make too much difference," Ifo institute economist Jan-Egbert Sturm told . Economists had on average expected the index to come out unchanged, but Chancellor Gerhard Schroeder said the dip was not surprising in the light of the Iraq conflict. The business expectations component of the index for western Germany fell to 97.2 from 98.4 while the index of firms' assessment of their current conditions fell only slightly, to 79.2 from 79.6, Ifo said. The east German business climate index fell to 100.8 from 102.0, Ifo said. Several bank economists said high oil prices and expectations of a conflict probably hit sentiment in March. Ulla Kochwasser, an economist at Mizuho Corporate Bank, said many firms did not appear to expect a quick economic recovery after the Iraq war.
"In the coming months the index could swing either way depending on developments in Iraq. At the moment it doesn't tell us very much," Kochwasser said. Manfred Kurz, an economist at Bayerische Landesbank, said the drop was a blow to hopes of a quick upturn. "The decline is certainly due to the situation in Iraq. In this respect, it is disappointing because one had hoped that the index would rise for the third month in a row, thus signalling a turnaround," said Kurz. Kurz said the European Central Bank's quarter-point interest rate cut earlier this month should have had a positive effect, especially as further rate cuts could be expected. "So the index is a blow for economic expectations." Schroeder said he was not surprised by the fall and said hopes of recovery in the second half of 2003 hinged on how long the Iraq war would last. "It's not surprising that the Ifo index hasn't made giant leaps upward in the current situation. The situation is of course marked by the Iraq war, how else could it be," Schroeder told a news conference in Berlin.
The euro held steady against the dollar after the Ifo index. It later edged up to trade at $1.0640 by 1200 GMT. Bond prices initially rose before easing as European equities gained. Ifo said sentiment in the retail and construction sectors improved while there was a slight deterioration in the manufacturing sector and wholesale trade. Europe's biggest carmaker Volkswagen AG said the war against Iraq had so far had no noticeable effect on the global car industry. "Until now there have been no noticeable movements either upwards or downwards," said VW Chief Executive Bernd Pischetsrieder at a suppliers fair.//