December 18, 2018 / 9:20 AM / in a month

German economy faces "lean" Christmas as business morale sinks

BERLIN (Reuters) - German business morale fell in December, a survey indicated on Tuesday, suggesting that concerns among company executives about the growth outlook for Europe’s biggest economy are rising.

FILE PHOTO: A worker walks on scaffoldings at an apartment building near former Tempelhof airport in Berlin, Germany, January 25, 2016. REUTERS/Fabrizio Bensch

The Munich-based Ifo economic institute said its business climate index fell for the fourth month in a row to 101.0, its lowest level in more than two years. This was weaker than a Reuters consensus forecast of 101.8.

“Concern is growing among German businesses,” said Ifo chief Clemens Fuest. “Companies were less satisfied with their current business situation. Their business expectations also continued to deteriorate. The German economy faces a lean festive season.”

Trade frictions, risks linked to the possibility of Britain leaving the European Union next year without a deal and weaker growth in emerging markets are putting the brakes on a nine-year upswing in Europe’s economic powerhouse.

Ifo economist Klaus Wohlrabe said the German economy was slowing but there was no recession in sight.

This has prompted the government to lower its growth forecast for this year to up to 1.6 percent. Ifo said the business climate level confirmed its prediction for 1.5 percent growth.

As the year draws to a close, the risks for the German economy appear to be outweighing any impetus from the global economy, said Andreas Scheuerle of DekaBank.

‘NO CHRISTMAS DELIGHTS’

Scheuerle cited Brexit and mass anti-government protests in France as possible headwinds for Germany, adding that signs of a detente in the trade conflict between China and the United States could spell good news for the German economy.

“Global news is fluctuating between concerns and relief,” said Scheuerle. “Pre-Christmas delights are not to be expected,” he wrote in a note.”

The government hopes tax cuts for middle and high income earners as well as higher child allowances that go into effect in January will boost consumption, which has replaced exports as the main driver of growth.

Ifo’s Wohlrabe said consumption could be performing better in view of increases in income and employment.

The economy is expected to rebound in the fourth quarter after a contraction of 0.2 percent between July and September, partly because one-off effects like bottlenecks in new car registrations due to stricter pollution standards should ease.

A low interest rates environment created by the European Central Bank, a solid labour market and rising wages should provide growth momentum in the face of rising risks.

“The risks to our forecast for growth in Germany to rebound, from 1.5 percent this year to 1.8 percent in 2019, are clearly mounting,” said Andrew Kenningham of Capital Economics.

He added: “For now we are still forecasting the ECB to raise interest rates in September 2019 but it is looking increasingly likely that a softer economic backdrop will force it to leave policy rates unchanged for longer.”

Writing by Joseph Nasr; Editing by Michelle Martin, Richard Balmforth

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