Brexit hits German business morale, Ifo index plunges

August 25, 2016 5:08 AM EDT

A street lamp is pictured in the financial district of Frankfurt in this August 6, 2013 file photo. REUTERS/Ralph Orlowski

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By Michael Nienaber

BERLIN (Reuters) - German business morale deteriorated sharply in August posting the steepest monthly drop since the height of the euro zone debt crisis in 2012, a survey showed on Thursday, in a sign that Brexit has weighed more heavily on sentiment among executives.

The Munich-based Ifo economic institute said its business climate index, based on a monthly survey of some 7,000 firms, fell to 106.2 in August from 108.3 in July.

That was the lowest reading since February and the sharpest monthly fall since spring 2012. The headline figure came in weaker than the Reuters consensus forecast for a rise to 108.5

"Business confidence in Germany has clearly worsened," Ifo head Clemens Fuest said in a statement. "The German economy has fallen into a summer slump."

A separate index measuring corporate expectations in Europe's biggest economy over a six-month horizon fell to 100.1. This was the lowest since October 2014, suggesting many firms expect economic headwinds.

"Brexit had a stronger effect now," Ifo economist Klaus Wohlrabe told Reuters, adding that business expectations deteriorated the most in sectors with relatively strong ties to the British market, such as chemicals and automobiles.

A sector breakdown showed that the weaker headline figure was driven by deteriorated sentiment in manufacturing, wholesaling and retailing.

In construction, the business climate remained at a record level, while domestic tourism boomed due to geopolitical crises abroad suggesting that the domestic economy is still doing well.

ING Bank economist Carsten Brzeski said the German economy's virtuous circle was still continuing. "However, without any new structural reforms and investments, it remains a virtuous circle on steroids," he added.

"Not the kind of steroids that could lead to a ban from the global economy but stimulus that mainly stems from two – in Germany heatedly debated – factors: refugees and the ECB."

A record influx of migrants has led to the strongest rise in state spending since the financial crisis in 2008. At the same time, rock-bottom interest rates continue to support private consumption and the construction sector.

The German economy grew 0.4 percent on the quarter between April and June, driven by higher exports, rising state spending and strong private consumption, after a mild winter helped it expand 0.7 percent between January and March.

The continued upswing generated a record budget surplus in the first half of this year, allowing Finance Minister Wolfgang Schaeuble to increase state spending on roads, housing, digital infrastructure and migrants ahead of federal elections in 2017.

Berlin expects domestic demand to drive overall growth of 1.7 percent this year which would be on a par with last year.

Exports are unlikely to contribute much to overall growth as demand from major trading partners like the United States and France wanes and orders from emerging markets such as China slow.

(Reporting by Michael Nienaber; Editing by Paul Carrel/Jeremy Gaunt)

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