German Business Confidence Declines to Two-Year Low

German business confidence fell to the lowest in more than two years in June as record oil prices and the prospect of higher interest rates dimmed the outlook for growth in Europe’s largest economy.

The Munich-based Ifo institute said its business climate index, based on a survey of 7,000 executives, declined to 101.3 from 103.5 in May. That’s the lowest since January 2006. Economists expected a drop to 102.5, according to the median of 42 forecasts in a Bloomberg News survey.
Germany’s Finance Ministry said June 20 growth will slow “markedly” in the second quarter after the economy expanded at the fastest pace in 12 years in the first. Rising prices are eroding spending power just as a stronger euro hurts exports. Europe’s manufacturing and services industries unexpectedly contracted in June, an industry report showed today.

“The high oil price has all the characteristics of a shock,” said Gerd Hassel, an economist at BHF Bank in Frankfurt. “Companies are right to expect harder times.”

Volkswagen AG, Europe’s largest automaker, said sales of VW-brand cars declined last month as higher fuel prices discouraged buyers. Air Berlin Plc, Europe’s third biggest low- cost airline, said last week it will cut its fleet and drop flights to Beijing and Shanghai to make up for rising prices.

“Economic growth in the second quarter could contract,” said Rainer Guntermann, an economist at Dresdner Kleinwort in Frankfurt. “Orders will probably continue to decline, but seen over the year it’s not the end of the world. Germany will still outperform the rest of the euro area.”

Bloomberg