German Business Confidence Drops to a 19-Month Low (Update3)

By Simone Meier

Sept. 25 (Bloomberg) -- German business confidence fell more than economists forecast in September, reaching a 19-month low, on concern the strength of the euro and increasing cost of credit will sap economic growth.

The Ifo sentiment index, based on responses from 7,000 executives, dropped to 104.2 from 105.8 in August, the research institute said in Munich today. Economists expected a decline to 105, the median of 38 forecasts in a Bloomberg News survey showed.

The euro's climb to a record $1.4130 threatens to curb exports after the U.S. housing slump roiled financial markets. The Cologne-based IW institute yesterday cut its growth forecast for Europe's largest economy next year. Business expectations dropped to the lowest level in almost two years, today's report showed.

The decline ``carries a bleak message of slower growth ahead for the German economy,'' said David Brown, chief European economist at Bear Stearns Cos. in London. The prospect of a German slowdown makes European Central Bank interest-rate cuts look ``more likely early next year.''

European government bonds rose for a third day today, with the yield on the benchmark 10-year German bund falling 4 basis points to 4.32 percent at 12:18 p.m. in London. Germany's DAX index fell as much as 0.8 percent.

ECB Waits

The ECB on Sept. 6 shelved a planned interest-rate increase, keeping the benchmark at 4 percent. The Federal Reserve pared its benchmark interest rate by half a point on Sept. 18 after losses on U.S. mortgages aimed at people with a poor credit history pushed up credit costs and raised concern that the U.S. economy may slip into recession.

In contrast, ECB council member Nicholas Garganas said in an interview in Athens late yesterday that ``any impact on economic activity of the financial market turmoil will be small.''

``With money and credit growth still running at very high rates, the upside risks to inflation dominate any effects stemming from the appreciation of the euro,'' he said.

Companies are benefiting from booming Asian demand. The European Commission said Sept. 11 the global economy may expand faster than previously predicted as growth in economies including China ``more than offsets'' a U.S. slowdown.

Volkswagen AG, Europe's largest carmaker, said Sept. 20 sales of its namesake brand will rise to a record this year. ThyssenKrupp AG, Germany's largest steelmaker, last month reported a 63 percent gain in third-quarter revenue.

Italian, French Consumers

In Italy, consumer confidence unexpectedly rose in September, Rome-based Isae Institute said today. French consumer spending on manufactured goods rose for a third month in August, led by purchases of automobiles, suggesting economic growth may be picking up from a second-quarter slowdown.

``We see a weakening, but not the end of the recovery,'' Gernot Nerb, an economist at Ifo, said in an interview today. ``It's still too early to tell.''

Economists expect the ECB to keep rates on hold for the rest of the year.

``I can't imagine another ECB rate increase after today's Ifo figures,'' said Ulrich Kater, chief economist at Dekabank in Frankfurt. ``Credit problems are affecting the economy.''

German investor confidence fell to a nine-month low this month, the ZEW institute said last week. Europe's manufacturing and service industries expanded at the slowest pace in two years, Royal Bank of Scotland Group Plc's purchasing managers' index showed Sept. 21.

Euro, Oil Record

The European currency has increased 5 percent against the dollar in a little more than a month. At the same time, oil prices have risen to records, pushing up energy bills. A barrel of crude cost $80.20 today, 60 percent more than on Jan. 18.

The IW institute predicted German growth will slow to 1.9 percent next year from 2.5 percent in 2007. It previously forecast a 2008 expansion of 2.2 percent. The Brussels-based European Commission on Sept. 11 trimmed its 2007 forecast for the 13-nation euro region to 2.5 percent from 2.6 percent.

A gauge measuring companies' confidence in the economic outlook six months from now fell to 98.7, the lowest since November 2005, from 100.4 in August, today's report showed. An indicator of executives' assessment of the current economic situation declined to 109.9 from 111.5 in the previous month.

Audi AG, Volkswagen's luxury unit in Ingolstadt, Germany, said Sept. 12 that U.S. sales will decline in the fourth quarter partly because of the dollar's weakness.

``We need to batten down the hatches, so to speak,'' Johan de Nysschen, Audi's U.S. chief, said in an interview that day. ``We think it's going to be stormy for a while.''

Last Updated: September 25, 2007 07:23 EDT