German business morale falls on gloomy services outlook

German economy, the Europe’s largest economy got off to a slow start in 2020 after narrowly avoiding a recession last year. German business morale also deteriorated unexpectedly in January as the outlook for services darkened, a survey showed on Monday.

The Ifo institute said its business climate index fell to 95.9 from 96.3 in December. The January reading confounded a Reuters consensus forecast for a rise to 97.0.

“The German economy is starting the year in a cautious mood,” Ifo President Clemens Fuest said, adding that companies had become more pessimistic regarding their outlook while their assessment of the current situation had improved slightly.

Business confidence in the service sector fell noticeably and the mood among construction managers also cooled. But the struggling manufacturing sector showed signs of a recovery.

“The big bright spot is industry,” Ifo economist Klaus Wohlrabe told Reuters, adding that business uncertainty in the sector had been reduced by Brexit clarity and the partial agreement reached in the US-Sino trade conflict.

Andrew Kenningham from Oxford Economics said the Ifo figures suggested that an improvement in Germany’s export-oriented manufacturing sector would partly be offset by a gradual weakening of domestic demand.

“Indeed, we think the economy will continue to grow at only a very anaemic pace in the first half of this year,” he said.

Employment and wage growth are expected to slow this year as the mighty car industry struggles with weaker foreign demand, tougher regulation and a broader shift towards e-cars.

The Ifo figures contrasted with a survey among purchasing managers published last week that showed Germany’s private sector gained momentum in January as growth in services activity picked up and the pullback in manufacturing eased.

The German economy expanded by 0.6 per cent in 2019, its weakest growth since 2013. The government expects 1.0 per cent growth in 2020, helped by an exceptionally high number of working days. Adjusted for calendar effects, Berlin predicts 0.6 per cent growth this year.

The government is due to present an updated growth forecast on Wednesday. Business daily Handelsblatt reported on Thursday it will slightly raise its 2020 forecast to 1.1 per cent or 1.2 per cent.

The Ifo economist Klaus Wohlrabe said business uncertainty had decreased over the past 3 months, helped by Brexit clarity and the settlement in the U.S.-Sino trade conflict. He added that the Iran conflict did not play a big role in the survey.

The Ifo figures contrasted with a survey among purchasing managers published last week that showed Germany’s private sector gained momentum in January as growth in services activity picked up and the pullback in manufacturing eased.

The German economy expanded by 0.6 per cent in 2019, its weakest growth since 2013. The government expects 1.0 per cent growth in 2020, helped by an exceptionally high number of working days. Adjusted for calendar effects, Berlin predicts 0.6 per cent growth this year.

The government is due to present an updated growth forecast on Wednesday. Business daily Handelsblatt reported on Thursday it will slightly raise its 2020 forecast to 1.1 per cent or 1.2 per cent.

The yield on the safe-haven German Bund also fell to its lowest in weeks on the back of growing concern that China’s coronavirus is more of a threat than anticipated.

So far, from the more than 2,750 infected globally, the virus has killed 81 people in China, which accounts for 98 per cent of the cases worldwide. But it has spread already to other countries including the United States, Australia and France.

The virus has caused alarm because it is still too early to know how risky it is and how easily it spreads between people. Also because it is new, humans have not been able to build immunity to it.

“The spreading ‘coronary angst’ leaves scope for the safety bid to extend,” said Rainer Gunterman, a rates strategist at Commerzbank.

“With the macro backdrop still looking inconclusive and the flow pattern improving, setbacks in Bunds should remain better buying opportunities,” Gunterman said.

Salvini had campaigned relentlessly in Emilia-Romagna since the start of the year, seeking a shock victory that he hoped would bring down the national coalition government.

But with nearly all the ballots counted, the incumbent Democratic Party (PD) governor had won 51.4 per cent of the vote compared to 43.7 per cent for the League’s candidate.

“The PD victory should afford BTPs a small relief-rally, but as long as political uncertainty lingers, they will fail to fulfil their tightening potential,” said Antoine Bouvet, senior rates strategist at ING.

The 10-year yield in Italy sunk to 1.061 per cent, its lowest since Nov. 1, and was last down 17 basis points on the day. The benchmark 10-year Bund yield declined to an eight-week low of -0.35 per cent and was last down 1 bps.

The spread between German and Italian 10-year government bond yield shrank to its tightest since Oct.28. Yields across other European nation also fell by 1 bps. The 10-year French and Dutch government bond yield both touched three-month lows, and so did the Belgium and Spanish ones.

In other news, Fitch Ratings on Friday upgraded Greece’s credit rating to ‘BB’ from ‘BB-’, saying that GDP growth and fiscal prudence were leading to government debt remaining at sustainable levels.

The 10-year Greek government bond yield was down 1.2 bps at 1.31 per cent, having fallen to a three-month low of 1.304 per cent.

Reuters