---- by STUART WILLIAMS ----
FRANKFURT (AFX) - A dramatic fall in Germany's key Ifo business climate index for February has put further pressure on the ECB to cut interest rates in April and is a clear sign the U.S. slowdown now is hitting the euro zone economy, economists said.
The headline Ifo business climate index in February failed to live up even to economists' lowest expectations, plunging to 94.9 from 97.5 in January. Economists' forecasts had ranged between 95.3-97.5. Economists said the dip in the keenly-watched business expectations component to 98.5 from 100.3 the month earlier was of particular concern, as it indicates the index is set to fall further in the coming months.
They said the figures are a significant blow to the European Central Bank's conviction that the U.S. slowdown will only have a limited effect on the euro zone.
ECB president Wim Duisenberg said at the ECB's last news conference there are no signs the slowdown in the U.S. is having "significant and lasting spillover effects" on the euro zone.
"The ECB has said it still lacks a clear indication that the global slowdown has reached the euro zone.... well here it is", said Adolf Rosenstock at Nomura. "These Ifo figures are an unambiguous indication", he added.
"They (the ECB) has to admit now the U.S. slowdown is taking its toll or they risk losing credibility", he said.
Coming only hours after the Federal Reserve said it is cutting rates by 50 basis points to help the U.S. economy, the Ifo figures may now force the ECB to cut its rates in April or even at its next meeting on March 29, economists said.
"Of course this puts the ECB under pressure to react", said Stephan Rieke at BHF Bank. "It may have to rethink its position and cut rates this month or shortly after."
Holger Fahrinkrug at UBS Warburg said the ECB's bullish growth forecast for the euro area of "close to 3 pct" this year is now looking increasingly untenable. "To this end today's data increases the chance of a rate cut in April relative to our current perception that May is more likely."
Economists noted however the ECB continues to make hawkish noises on inflation threats in the euro area and its mandate is to preserve price stability rather than promote growth.
Bundesbank president Ernst Welteke said last week it may take until the end of the year before inflation comes in below the ECB's stability ceiling of 2 pct.
"I do not think the ECB is ready to make a cut now because of inflation," said Gulliame Menuet at 4Cast. "But it (the Ifo data) certainly increases the odds of an early April move", he added. Economists said the plunge in Ifo makes it likely that Germany's economic performance this year adversely impacts euro zone growth, while countries such as Belgium and the Netherlands remain in robust shape.
They added institutes may once again be forced to downgrade their German growth forecasts this year having only just completed revisions forced by sluggish fourth quarter GDP data.
"The German economy is now on the way down and very weak data will follow", said said BHF Bank's Rieke. "We are in a clear cooling phase and Ifo for the moment is only the precursor of this".
Nomura's Rosenstock said today's figures mean Germany's much heralded tax reform this year will provided a significantly more limited boost to growth than hoped.
"It looks like the push from the tax reform will last for only 1-2 months, rather than the 1-2 quarters that had been expected", he said. Economists said after the brief tick upwards in January, Ifo will remain stuck in a downwards trend in the comings months. Germany's reliance on external trade leaves it vulnerable to the U.S. slowdown and conditions in the moribund domestic construction industry show no signs of improving, they said.
4Cast's Menuet said the the sharp drop in the business expectations is of particular concern. "The expectations normally lead the main index by 2-3 months -- this means we will not see a trough until the end of the second quarter or in the third quarter", he said.