German business climate darkens

FRANKFURT, Germany -- Confidence among German's top companies may be fading, as Europe's biggest economy stumbles to recover from recession amid rising unemployment and volatile markets.

Business leaders are worried that recent plunges in global stock markets could hurt investment in companies -- resulting in more insolvencies and job losses -- and reduce consumer spending, according to the Munich-based Ifo economic institute.

The manufacturing sector, which powers much of Germany's economy, is particularly concerned about the German economy as a strengthening euro -- which makes exported goods more expensive -- could soon cut into sales revenue.

Ifo's closely watched monthly index -- based on a survey of 7,000 west German businesses -- fell to 89.9 points in July from 91.3 in the previous month. Most economists had expected the reading to be unchanged.

The decline in the index -- which tracks both current and future expectations for business conditions -- took many by surprise. It follows a bigger-than-expected fall Italian business confidence in July, while Belgium's leading economic indicator was also lower this month.

"We expected a fall in the expectations component, but the fact that the current situation component also fell places a question mark over the expected upturn in the second half of this year,'' Dirk Chlench, an economist at Essen Hypothekenbank, told Reuters.

"It's also worrying that the decline came from the manufacturing industry, unlike construction or retail, where the figures are often volatile."

Finance Minister Hans Michel on Thursday acknowledged that recent market turbulence is a threat to private consumption and business investment.

"We now have the first estimates of growth in the second quarter in Germany and the economy is growing faster than in the first quarter. That means we are growing again but naturally this [turbulence] poses risks which we should not evade,'' Michel said on German television.

The German economy grew by just 0.2 percent in the first quarter of this year, after contracting during the second half of 2001.

While the government is predicting growth of 2.5 percent next year, Germany's DAIWA research institute expects the economy to expand by 2 percent.

The economy has been plagued by rising unemployment -- which increased by 39,000 to 4.092 million in June -- as higher wage settlements push up business costs and company failures have resulted in huge job losses.

Earlier this month, 111-year-old engineering group Babcock Borsig said it had abandoned attempts to save the company after filing for insolvency.

Babcock's insolvency follows the failures this year of construction giant Philipp Holzmann, the Kirch media group, stationery company Herlitz and aircraft manufacturer Fairchild Dornier.