Key German business confidence indicator unexpectedly falls in October

FRANKFURT – A key measure of German business optimism unexpectedly edged lower in October, in another reminder that Europe’s fledgling economic recovery is less than robust.

The Ifo index, published Friday, slipped to 107.4 points in October from 107.7 the month before. The consensus in the markets was for a modest rise to 108.0.

It was the first decline after five months of increases and follows a dip in surveys of activity in the services and manufacturing sectors in the 17 countries that share the euro currency.

Ben May, European economist at Capital Economics, wrote in a note to investors that Friday’s Ifo decline “provides another timely reminder that the eurozone recovery remains fragile.”

The eurozone as a whole returned to growth in the second quarter, expanding 0.3 per cent with help from Germany, the largest member. That followed six straight quarters of declining output. But the European Central Bank warns that the recovery is still fragile, with unemployment high at 12 per cent and lending to businesses weak.

ECB statistics on Friday showed that bank loans to companies fell 3.5 per cent in September. That is a little better than the 3.8 per cent drop the month before. But it shows companies still see little reason to take a chance on borrowing money to expand their operations in the current economy.

ING economist Carsten Brzeski said the German economy remains in good shape despite the dip in the Ifo index. He said concern over the U.S. budget impasse — specifically its possible impact on economic activity — and a stronger euro exchange rate “are not the most favourable mix for the German export sector.” A stronger euro makes Germany’s exports less competitive on price.

The Ifo index is considered a leading indicator showing where the economy may be headed in the months ahead. It is based on a survey of 7,000 German businesses.