German Business Confidence Deteriorates Amid Heightened Risks

(Bloomberg) -- German business sentiment fell to its weakest level in almost three years as trade uncertainties and waning growth in China amplified concerns over the economic outlook.

The Ifo Institute’s gauge of corporate confidence in Europe’s largest economy fell to 99.1 in January from 101.0 in December. The fifth straight decline will increase doubts over Germany’s ability to recover from a slump in the second half of last year, especially after a separate report this week showed manufacturing unexpectedly shrank in January.

While European Central Bank President Mario Draghi said Thursday that a recession wasn’t a likely scenario, he offered a more gloomy economic assessment than just six weeks ago, when policy makers decided to cap stimulus. Risks to the outlook “have moved to the downside,” he said, citing protectionism and volatility in emerging and financial markets.

Key Insights

• “Disquiet is growing among German businesses,” said Ifo President Clemens Fuest. “The German economy is experiencing a downturn.”
• Expectations fell to lowest level since late 2012
• The report chimes in with a separate survey of purchasing managers that showed on Thursday German manufacturing entered its deepest slump in four years. New orders fell at the sharpest pace since 2012, with the auto industry and weaker demand in China cited.

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• ECB Executive Board member Benoit Coeure said in a Bloomberg TV interview in Davos that persistent economic weakness in the euro area “has surprised us.” Asked whether interest rates will rise this year, he said “it’s too early to have that discussion because we’re still understanding the nature of the shock.”
• Governing Council member Francois Villeroy de Galhau said in a separate interview in Davos that ECB economic forecasts will probably be cut in March and “we will be very pragmatic in the implementation” of policy.

--With assistance from Catarina Saraiva, Kristian Siedenburg and Harumi Ichikura.

To contact the reporter on this story: Piotr Skolimowski in Frankfurt at pskolimowski@bloomberg.net

To contact the editors responsible for this story: Paul Gordon at pgordon6@bloomberg.net, Jana Randow

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