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German Business Confidence Dives Again as Economy Wobbles

Piotr Skolimowski
German Business Confidence Dives Again as Economy Wobbles

(Bloomberg) -- A slump in German business confidence deepened in June as trade tensions weighed on manufacturers.

U.S.-led protectionist threats have clouded the growth outlook in Europe’s largest economy for months, contributing to a manufacturing slump and boosting fears that domestic demand will be undermined. European Central Bank President Mario Draghi last week said he’ll inject fresh monetary stimulus for the euro zone unless the economy improves.

The drop in the Ifo index took the closely watched gauge to 97.4, its lowest level since late 2014. A gauge of expectations also worsened. The euro barely moved on the news and was up 0.2% at $1.1392 at 10:36 a.m. Frankfurt time.

“It could get worse, maybe not much worse but a little,” said Ifo President Clemens Fuest in a Bloomberg Television interview. “It’s justified to at least postpone any tightening of monetary policy. But I don’t think further easing will help very much. Mario Draghi has rightly pointed out that governments need to use other instruments.”

What Bloomberg’s Economists Say....

“Risks to the economy remain tilted to the downside, with both the headline expectations balance and the Ifo manufacturing sentiment down in June. Still, the quarterly average remains in line with the first quarter and suggests the economy remained broadly stable in the first half.”--Maeva Cousin. Click to see her GERMANY REACT

Draghi told European Union leaders last week that a more expansionary fiscal policy may be needed should the euro-zone economy deteriorate, and has long called for structural reforms to bolster resilience.

While Bundesbank President Jens Weidmann expects an improvement in Germany in the second half of the year as exports recover, the signs so far remain mixed. A purchasing-managers survey on Friday showed solid growth in services, but manufacturing remained in contraction. Investor confidence in the nation worsened dramatically this month.

Bechtle AG recently lowered its sales expectation for this year, citing the economic slowdown. Geopolitical uncertainties and trade restrictions also forced chip-maker Siltronic AG to curb its outlook.

HSBC on Monday predicted the ECB will cut its deposit rate by 10 basis points in each of September and December, taking the rate to minus 0.6%, though it doesn’t expect an “imminent” resumption of quantitative easing.

“Members of the ECB Governing Council have been lining up to sound dovish,” Simon Wells, HSBC’s chief European economist, said in a note. “In part, this reflects the global policy backdrop, given the U.S. Fed is now expected to cut rates this year. But it also reflects the sluggishness of core inflation, which is not picking up despite higher wage growth. When we factor in the downside risks from the global trade tensions and a possible ‘no deal’ Brexit, it is understandable that the ECB might be getting more concerned.”

(Updates with HSBC forecast in final two paragraphs.)

--With assistance from Kristian Siedenburg, Catarina Saraiva, Harumi Ichikura, Carolynn Look, Alexander Kell and Francine Lacqua.

To contact the reporter on this story: Piotr Skolimowski in Frankfurt at pskolimowski@bloomberg.net

To contact the editors responsible for this story: Paul Gordon at pgordon6@bloomberg.net, Jana Randow

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