German business confidence unexpectedly fell for the fourth time in six months in June, the influential Ifo survey showed on Friday, signalling that economic recovery is at growing risk from weak domestic demand. The Munich-based Ifo institute said its business climate index fell to 94.6 in June, its lowest level since September 2003, from a revised 96.0 in May as the 7,000 firms it surveys grew more downbeat about both current and future prospects. "The latest survey results indicate that the cyclical recovery is not yet on a broad solid base," Ifo President Hans-Werner Sinn said. If the index fell again in July the European Central Bank should cut interest rates, he later told CNBC television.
Ifo said the decline in business affected all four sectors of the economy it surveys each month but was particularly strong in retailing and wholesaling -- the two areas most exposed to domestic demand. Economists said the recovery could be vulnerable to a setback if there were no pick up in private consumption soon. "There have already been four falls in the Ifo index this year, which is certainly a sign that the risk of another economic downturn in the second quarter is growing," said Bernd Weidensteiner of DZ Bank. "The domestic economy is not being ignited by the global economy." Germany's economy ministry said the Ifo survey showed the recovery was not yet firmly in place, blaming high petrol prices for sapping consumer spending power. Germany's GfK market research company is due to release the results of its monthly consumer sentiment survey on Monday.
GLOOMY GERMAN CONSUMERS
The Ifo survey tallied with anecdotal evidence from retailers that business remains tough and contrasted with surveys this week showing rising business and consumer confidence in Belgium and the Netherlands. French consumer spending also remains close to four-year highs despite slipping slightly in June. German domestic demand was stagnating "because employment is increasingly decoupling from production", said Sinn. He has argued that German exports increasingly use components made abroad, meaning that greater demand does not automatically lead to more jobs in German factories. Seasonally-adjusted unemployment rose in May for the fourth month in a row to 4.374 million. "(Ifo) reinforces our belief that companies will remain very cautious in their investment and employment plans for some months to come, limiting growth prospects," said Howard Archer of Global Insight, a company that provides economic analysis. The drop in the Ifo index bucked expectations in a poll of economists for a slight rise to 96.4 and was below even the most pessimistic forecast for a reading of 95.7. The DAX <.GDAXI> index of leading shares gave up early gains after its release, while bond prices rose to day highs. An index measuring companies' assessment of their current situation fell to 93.2 from 94.4 in May, while an index measuring expectations for the coming months fell to 96.0 from a revised 97.7. The results came after Ifo raised its 2004 economic growth forecast for Germany to 1.7 percent from a 1.5 percent forecast made jointly with Germany's other leading economic think tanks in April. Sinn said he was still optimistic the German economy, which contracted in 2003, would post "decent" growth this year. ///