Germany's closely-watched Ifo business climate index fell in February for the first time in 10 months in what the Ifo institute said was a "small warning signal" for the recovery in Europe's largest economy. Ifo said on Tuesday the index fell to 96.4 from 97.5, bucking expectations among analysts for a slight rise, as companies' expectations about future business fell to the lowest level since October. It was the first drop in the index, covering the whole of Germany for the first time, since April 2003. The monthly survey of 7,000 firms found their assessment of the current situation rose slightly to the highest level since July 2001 but this was not enough to offset a more downbeat outlook among manufacturers and wholesalers, Ifo said.
The current situation component edged up to 92.6 from 92.5, but expectations fell to 100.4 from 102.9. "The unfavourable development occurred mainly in wholesaling and manufacturing, where both the business situation and the expectations worsened," Ifo said. "In construction, the business climate deteriorated only slightly, and it improved in retailing," it added. Manufacturing accounts for around 57 percent of the index. "The slight decline in the business climate with a still unsatisfactory business situation is a small warning sign for the economic recovery," Ifo President Hans-Werner Sinn said. Ifo said the strong euro had weighed on manufacturers' export expectations but, overall, responses about export prospects were still positive. However, the institute said it was now important to "keep the exchange rate under control".
Rainer Sartoris, an economist at HSBC Trinkaus, said: "It's no surprise that the expectations component fell but the meagre rise in the current conditions index shows that this recovery is lagging behind expectations. "It fits in with our forecast of a slight upturn during the first half of 2004 followed by a slowdown setting in during the second half. "We're seeing the effects of the euro's appreciation, and consumer spending is stagnant. We need consumer spending to pick up to keep this upturn going."///