German business morale weakens and trade dampens first quarter growth

By Michelle Martin

BERLIN (Reuters) – German business morale deteriorated slightly in May for the first time in seven months though it remained at a high level overall, a leading survey showed, adding to signs of softening in Europe’s largest economy.

Although growth levels remain decent, separate data published on Friday showed the slowing of the German economy during the first quarter was down to a drag from foreign trade, which had propelled the economy for much of the past decade.

The Munich-based Ifo think tank said its business climate index, based on a monthly survey of 7,000 firms, edged down to 108.5 in May from 108.6 in April. That was slightly above the Reuters consensus forecast for 108.3, sending the euro to a day’s high against the dollar.

It comes after ZEW’s survey this week showed investor sentiment weakening and a purchasing managers’ survey (PMI) showed private sector expansion slowing.

“With today’s GDP data, yesterday’s PMIs and now the Ifo, new doubts about the strength of the German economy could emerge again,” said Carsten Brzeski, economist at ING.

“Germany is at the end of a very positive reform-growth cycle, which is artificially extended by external tailwinds,” he said, adding that in view of the long recovery the German economy already has behind it, it was normal that its growth rate would be weaker than the rest of the euro zone.

The Ifo survey showed companies were more optimistic about the current situation than at any point since June 2014 but they became slightly more pessimistic about their future prospects.

Sentiment in the manufacturing and wholesaling sectors weakened while the mood among retailers and builders picked up.

The first quarter gross domestic product (GDP) data, confirmed at quarterly growth of 0.3 percent, disappointed when compared with the euro zone as a whole, where GDP increased by 0.4 percent, and was well shy of France’s 0.6 percent growth.

But economists remained upbeat.

“The full effect of the weaker euro on export volumes has yet to kick in and a growth rebound in the US and other important export markets should deliver more neutral net exports,” said Christian Schulz, economist at Berenberg Bank.

“That should support solid growth rates in coming quarters,” he said, adding that 1.8 percent growth should be achievable.

Ifo said it was sticking to it second-quarter growth forecast of 0.5 percent.

A detailed breakdown of first quarter data showed domestic demand contributed 0.5 percentage points to GDP growth while foreign trade subtracted 0.2 percentage points as imports rose almost twice as strongly as exports.

Private consumption contributed 0.3 percentage points to growth as consumer benefiting from a robust labor market, rising wages and low inflation splashed out.

Gross capital investment, which weighed on growth in mid-2014, added 0.3 percentage points.

On Friday the finance ministry said a favorable business environment should support the economic upswing for the remainder of this year and the economy ministry has previously said GDP will keep growing at a moderate pace, with foreign trade likely to make a positive contribution in the spring.

(Additional reporting by Michael Nienaber; Writing by Michelle Martin; Editing by Toby Chopra)

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