German business morale tumbles

German businesses are feeling less optimistic about an economic recovery

FRANKFURT, Germany (CNN) -- Confidence among German business leaders deteriorated for a third straight month in August as a recovery in Europe's biggest economy continued to falter.

A key barometer of corporate confidence indicates that the German economy, which barely grew in the second quarter of this year after falling into recession in the previous two quarters, could weaken further in coming months.

The Ifo Institute's monthly survey of 7,000 west German companies, which has declined for the past two consecutive months, showed both current and future expectations for the economy fell again in August.

The business climate index dropped to 88.8 points this month from 89.9 in July and 91.3 in June. Analysts polled by Reuters has expected a reading of 89.0 in August.

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"The Ifo index signals the recovery could have stalled, at least temporarily,'' Ifo President Hans-Werner Sinn said in a statement on Wednesday.

The institute has maintained that three consecutive declines in its index would indicate a new trend of interrupted economic recovery.

"The risk that recovery remains weak [in the second half of this year] has increased," Ifo's chief economist Gernot Nerb told Reuters.

However, Nerb said was unlikely that the German economy would slip into recession again -- although he added that Ifo's forecast for 2002 growth of 0.7 percent now appears "ambitious."

Analysts point to a sharp drop earlier this month in a similar sentiment survey -- this one by the ZEW institute -- as a further indication of a faltering German economy.

The ZEW survey showed a drop of 25.7 points to 43.4 in August, its biggest decline in two years.

Signs of deterioration in business sentiment come amid the financial fallout from severe flooding in Germany and uncertainty about the outcome of national elections.

Business leaders have been critical of a government proposal to raise corporate taxes and delay income tax cuts planned for 2003 in order to help victims of the recent floods in eastern Germany and cover reconstruction costs.

"Every tax increase is the wrong thing for the economy and poison for economic growth,'' Dieter Hundt, president of the employers' association, told Reuters. "That includes the planned increase in the corporate tax as well as the next increase in petrol taxes.''

German Chancellor Gerhard Schroeder, who is facing an upward battle to win re-election on September 22, said last week he would raise corporate tax by 1.5 percentage points for one year to 26.5 percent as part of the relief plan.

His opponent, Edmund Stoiber, responded by calling for profits from the Bundesbank -- Germany's central bank -- to be used to help pay for the billions of euros of flood damage.

Unemployment running high

Schroeder is also under pressure because of his government's poor economic performance since coming to power four years ago.

Falling exports -- the main engine powering the German economy -- and high wage settlements has pushed unemployment above the 4 million mark, with the jobless rate hovering around 9 percent.

As a result, Schroeder has been forced to back away from a pledge to reduce unemployment to below 3.5 million during his first term in office.

Meanwhile, economic performance in the 12-nation eurozone is also expected to weaken this year.

Otmar Issing, chief economist of the European Central Bank, said the region is unlikely to meet forecast growth of between 2 and 2.5 percent by the end of 2002.

"Economic activity in the first quarter clearly picked up from the previous quarter and the trend that was reached should more or less hold in the second quarter," he told Reuters. "However, that means that the expected acceleration did not occur."