German business morale dips; growth may be peaking

German business sentiment weakened further in April from a two-decade high it hit in February, a survey showed, adding to evidence that growth rates in Europe's largest economy may be near their peak. Thursday's business climate index from the closely watched Ifo think tank in Munich fell to 110.4, a second consecutive monthly drop that put it a tenth of a point lower than a median forecast made by economists.
Finance ministry figures released earlier in the day showed the pace of German growth likely almost doubled in the first quarter, but a raft of other data suggests that, while remaining robust, the rate of expansion will slow in coming months. "In face of the high oil prices, the Japanese crisis and other risks, it was to be expected that companies would not have quite such a rosy outlook anymore," said Ralph Solveen from Commerzbank. "The peak of the economic cycle will pass us by in the next few months."
April's Ifo figure was not for from the 111.3 reached two months earlier, its strongest reading since records for a unified Germany began in 1991, but a subindex tracking business expectations dropped more than anticipated to 104.7, from 106.5 in March.
"Fundamentally the Ifo index still points to an improving business cycle," said Thilo Heidrich from Postbank. "The recovery is continuing, even though it will be slightly dampened in the coming months." Germany's economy, supported by a buoyant manufacturing sector and domestic demand that has risen as unemployment has declined, has recovered faster than expected from its deepest recession since World War Two.
In contrast with the depressed economic picture in many other parts of Europe, it remains on a firm growth path, and an unexpected rise in the Ifo subindex tracking current conditions to 116.3 from 115.8 indicated German businesses continue to prosper both at home and abroad. Berlin last week hiked its growth forecast for 2011 to 2.6 percent, saying rising spending by consumers less worried about losing their jobs had marked a turning point that had put economic expansion on a strong footing.
On Thursday, the finance ministry said the economy probably expanded by 0.75 percent in the first quarter of 2011 up from 0.4 percent in the previous quarter. But that rate of growth is expected to ease in the second quarter, a recent PMI survey, Germany's ZEW index and a Reuters quarterly poll show.
"Expectations are normalising," said Carsten Brzeski from ING. "However ...even after today's drop, the Ifo remains close to record highs and bodes well for a continuation of strong German growth." Opinion was divided on the impact of risks to growth from abroad, with independent economists saying they had cast a cloud over the outlook while Ifo economist Klaus Abberger told Reuters no part of the German economy would suffer dramatically because of the Japanese crisis.
"(Ifo) expectations for future conditions (...) now stand at their lowest level since September of last year," said Nick Kounis at ABN Amro. "Still, Germany should continue to outperform the eurozone average. We expect the economy to grow by 3 percent this year, well above the 1.6 percent seen for the eurozone as a whole."