German Business Confidence Falters Again in October, Ifo Survey Shows

By Politics Dow Jones Newswires

German business confidence slumped in October, a key indicator showed Monday, suggesting that significant growth risks remain in Europe's largest economy.

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However other data released Monday points to a bottoming out of the eurozone's weak bank lending trend, although experts doubt that this will rebound soon.

Taken together, the reports signal that the eurozone will have a tough time emerging from near stagnant growth levels in the near term, even if the risks of a credit crunch have subsided.

The closely watched Ifo Institute's survey's lead indicator for Germany fell to 103.2 in October from 104.7 in the previous month. The drop was below analysts' expectations of a decline to 104.5 and comes on the heels of recent data showing sharp declines in Germany's key industrial sector in August. It was the Ifo indicator's sixth straight fall, reaching its lowest level in almost two years.

"The outlook for the German economy deteriorated once again," said Ifo President Hans-Werner Sinn in a news release.

The data point to much lower growth in Germany than was expected earlier in the year. Germany's DIHK Chambers of Commerce Monday cut its 2014 growth forecast to 1.3% from an earlier 1.5% and sees growth next year at 0.8%.

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German gross domestic product contracted slightly in the second quarter after strong growth in the first three months of the year. Recent data point to slight growth, at best, during the third quarter while the Ifo figures forecast a sluggish start to the fourth quarter too.

"The economy in Germany is being thwarted from many sides," said DIHK Chief Executive Martin Wansleben Monday in Berlin, adding that above all, international crises were dampening growth. Germany's government and leading economic think tanks have also recently sharply cut growth forecasts.

As the largest economy in the currency bloc, Germany's prospects have a clear impact on developments in the wider eurozone, particularly with other euro members such as France and Italy struggling with stagnation or recession.

Other data Monday showed some preliminary signs of improvement in bank lending, but it may take time for this to feed through to the economy. Data from the European Central Bank showed lending to firms and households continued to decline in annual terms in September, though the pace of contraction was narrower than in previous months.

"While the data are somewhat better than expected, pointing to a bottoming out of the credit cycle, they still don't signal a strong credit recovery over the coming quarters," said ING analyst Peter Vanden Houte.

The figures came a day after largely positive results from the ECB's long-awaited health check of European banks. The ECB said Sunday that all but 13 of the continent's leading banks have enough capital to ride out another economic storm.

The results of the so-called stress tests suggest that most lenders are in a position to make loans to eurozone firms and households, although there is still serious doubt as to whether there is sufficient demand for loans, given stagnant growth and rock-bottom inflation.

The eurozone barely grew in the second quarter versus the first quarter and might not have grown at all in the third quarter. Its inflation rate of 0.3% puts it dangerously close to a deflationary environment, which some experts say would push consumers to delay purchases and make debts harder to repay.

The ECB has pledged to buy asset-backed securities and covered bonds to help bring annual inflation closer to its target of just under 2%, and has extended conditional loans to banks at four-year maturity.

(Brian Blackstone and Andreas Kissler contributed to this article.)