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German business confidence dips on political impasse

Morale among German business leaders has fallen slightly, according to the closely-watch Ifo sentiment barometer, but remains “excellent” despite uncertainty over the next German government coalition.After hitting an all-time high in the previous month, Ifo institute’s business climate index dropped to 117.2 points in December from an upwardly revised reading of 117.6 points in November.

The reading came in below expectations, although Ifo president Clemens Fuest described business leaders’ moods as “full of festive spirit.”

“Sentiment among German businesses is excellent ahead of Christmas, but no longer quite as euphoric as last month,” said Fuest.

Read more: Exports, investment drive German growth in third quarter

The slightly lower reading comes as Chancellor Angela Merkel is struggling to form a stable government. Her conservative CDU/CSU bloc lost voters to the far right in September’s election and her attempt at a tricky three-way alliance with two smaller parties failed last month.

Clouds on the horizon

Businesses were more optimistic about their current economic situation than in November, the survey of some 7,000 firms showed, but they expressed greater wariness about the future.

Ifo economist Klaus Wohlrabe said that uncertainty among German businesses over the shape of the new government had risen slightly. Merkel’s conservatives will now begin exploratory talks with the center-left Social Democrats, which will likely demand higher government spending on social policy.

The “sharp drop” in business expectations “suggests that German businesses do seem to care about politics,” said economist Carsten Brzeski of ING Diba bank.

Looking at the Ifo index in detail, manufacturing firms, retailers and wholesalers were all less cheerful about their prospects. Only construction firms reported a brighter outlook for the months ahead.

Stellar year for German business

The latest data caps a euphoric year for the German economy, with brisk domestic and foreign demand powered by record-low unemployment at home, low interest rates and a strengthening global recovery.

The German government recently upgraded its economic growth forecast for 2017 from 1.5 to 2.0 percent. The Bundesbank central bank is even more bullish expecting 2.6 percent this year and 2.5 percent in 2018.

Read more: DAX-listed firms eye record full-year profits

That is why Ifo economist Wohlrabe warned against over-interpreting the drop in December. “If the situation is already very good it is even more difficult to expect better business,” he said.

uhe/nz (Reuters, dpa, AFP)

Topics: Business German

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