German confidence hits five-year low

The mood in German industry remains grim

Germany's IFO index, a key measure of business confidence, has fallen to a five-year low.

The IFO's key index, which measures the west German business climate, fell to 89.5 in June, down from 90.8 in May and well below most economists' expectations.

The news will be another blow to the EU's single currency, which fell by 0.2 US cents against the dollar, before recovering to 86.8 US cents.

Germany is the eurozone's largest economy, and if its fortunes flag, the eurozone's 11 other countries are likely to suffer as well.

"The European Central Bank will definitely take it into account and lower interest rates at some point," said Stefan Bielmeier of Deutsche Bank Research.

"I expect a 25 basis-point rate cut after the summer break, more likely in September."

No turnaround

Gernot Nerb, head of IFO's macroeconomic unit, said he saw no signs of a turnaround.

"Companies are still sceptical about their profit outlook, particularly in industry," he said.

Economists and think-tanks have slashed their German growth forecasts for the whole of 2001, but expect activity to pick up in the final quarter of the year.

IFO forecasts the Germany economy to grow by 1.2% this year, and there is speculation that this number may be lowered.

All down

The IFO index, compiled by Germany's Institute for Economic Research, is based on a monthly survey of 7,000 German enterprises.

Aside from the key west German figure, all the other components of the IFO fell in June.

The IFO index for eastern Germany ticked down in June to 102.1, compared with 104.7 in May.

And the forward-looking index of business expectations dropped to 93.6 for western Germany, compared with 94.9 in May.