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German business confidence slides

German business confidence fell in February knocking hopes of a speedy recovery in Europe's largest economy.

Munich-based research institute Ifo said that its confidence index fell to 95.5 in February from 97.5 in January, its first decline in three months. The study found that the outlook in both the manufacturing and retail sectors had worsened. Observers had been hoping that a more confident business sector would signal that economic activity was picking up.

"We're surprised that the Ifo index has taken such a knock," said DZ bank economist Bernd Weidensteiner. "The main reason is probably that the domestic economy is still weak, particularly in the retail trade." Economy and Labour Minister Wolfgang Clement called the dip in February's Ifo confidence figure "a very mild decline". He said that despite the retreat, the index remained at a relatively high level and that he expected "a modest economic upswing" to continue.

Germany's economy grew 1.6% last year after shrinking in 2003. However, the economy contracted by 0.2% during the last three months of 2004, mainly due to the reluctance of consumers to spend. Latest indications are that growth is still proving elusive and Ifo president Hans-Werner Sinn said any improvement in German domestic demand was sluggish. Exports had kept things going during the first half of 2004, but demand for exports was then hit as the value of the euro hit record levels making German products less competitive overseas. On top of that, the unemployment rate has been stuck at close to 10% and manufacturing firms, including DaimlerChrysler, Siemens and Volkswagen, have been negotiating with unions over cost cutting measures. Analysts said that the Ifo figures and Germany's continuing problems may delay an interest rate rise by the European Central Bank. Eurozone interest rates are at 2%, but comments from senior officials have recently focused on the threat of inflation, prompting fears that interest rates may rise.