Why German business morale has dropped from its record high

German business confidence fell less than expected in August after climbing to three record highs in a row, suggesting that a consumption-led upswing in Europe’s largest economy will continue despite concern about a car emissions scandal.

The Munich-based Ifo economic institute said on Friday its business climate index, based on a monthly survey of some 7,000 companies, edged down to 115.9 from 116.0 in July. Economists surveyed by Reuters had forecast a drop to 115.5.

“Germany’s economy remains on track for growth,” Ifo chief Clemens Fuest said in a statement.

The drop was caused by companies taking a slightly less positive view of the current business situation. However, managers’ business outlook for the next six months improved to its highest level since January 2014, the survey showed.

A sector breakdown of the Ifo figures showed the main drag came from retailing. Sentiment improved against the trend in manufacturing and construction.

Ifo economist Klaus Wohlrabe linked the drop in retailing to the emissions scandal and cartel allegations engulfing Germany’s car industry, which is the country’s biggest exporter and employs some 800,000 people. “Car retailers are feeling the restraint of customers,” Wohlrabe said, although he noted the emission scandal did not seem to have hit business morale in the automobile industry itself.


No limit

Wohlrabe said that the German economy appeared unaffected by global political developments, adding: “The German economy has not reached a growth limit. There is still room on the upside.”

The Ifo index came after data that showed the economy continued to expand in the second quarter, growing by 0.6 per cent on the quarter and by 2.1 per cent on the year, driven by strong private consumption.

“The German economy is humming. The strong growth momentum that we saw in the first half of the year will carry into the third quarter,” KfW bank chief economist Joerg Zeuner said.

Following the release of the GDP data, KfW raised its 2017 growth forecast for the German economy to a calendar-adjusted 2.3 per cent from its previous estimate of 1.9 per cent.

“With less than one month to go before Germany’s federal election, today’s data bode well for Angela Merkel’s already-strong prospects for re-election,” Capital Economics analyst Stephen Brown said.

Still, sentiment indicators published earlier this week have painted a rather mixed picture of the economic outlook.

Investor morale fell the third month in a row amid concerns that the car emissions scandal could damage the economy in the medium term. A survey of purchasing managers showed, however, that manufacturing and services grew faster in August.

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