The Ifo institute's gauge of German business confidence fell unexpectedly to its lowest level in almost two years in May, adding to evidence that growth in Europe's biggest economy slowed sharply in the second quarter.
Ifo's closely-watched business climate index, based on a monthly survey of around 7,000 firms, declined for a fourth straight month to 92.9, the lowest since August 2003, from 93.3 in April, the Munich-based think tank said on Wednesday...
Three straight declines in Ifo's headline index, one of Europe's most closely-watched economic indicators, typically signal a downturn in Europe's biggest economy, analysts say.
What gives? Here is one interpretation.
Andreas Rees, an economist at HVB Group in Munich, said the political situation in Germany, in particular an attack on investors by the chairman of the ruling Social Democrats (SPD), probably helped to depress the expectations component in May.
"Since fundamentals, like the lower oil price and the decreasing euro-dollar exchange rate, should have painted a rather bright picture for companies in May, we do suspect that political events played a major role here," Rees said.
"SPD chairman's (Franz) Muentefering bashing of capitalism and the heated public discussion about firms' shortcomings -- above all job cuts and exaggerated salaries -- obviously weighed heavily on companies' minds," he added.
However, Ifo economist Klaus Abberger said on Wednesday the prospects of an early general election could help to improve business sentiment in the coming months as it offered hope of further economic reforms in Germany.
Nonetheless, the news prompted this follow-up to this week's OECD advice to the European Central Bank (as reported in the Financial Times):
Hans-Werner Sinn, Ifo’s president, said the European Central Bank’s 2 per cent inflation target was too low and that it should lower interest rates. This echoed the call from the Organisation for Economic Co-operation and Development on Tuesday to act immediately “by significantly cutting policy rates”.
“Europe is performing badly,” said Dr Sinn. “In such a situation I think we should reduce the interest rates.”
More on mounting pressures on the ECB in the next post.