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German business sentiment sours

German business morale fell in March, breaking a four-month run of gains and highlighting concerns the reignited debt crisis in the eurozone will test the resilience of Europe’s largest economy.

The Munich-based Ifo think tank said on Friday its business climate index, based on a monthly survey of some 7,000 firms, fell to 106.7 in March, down from 107.4 in February and below a forecast of 107.6.

Months of relative calm in the eurozone came to an end with an inconclusive election in the bloc’s third-largest economy Italy, and a crisis over emergency funds for Cyprus that could culminate in the island state exiting the common currency.

Ifo economist Klaus Wohlrabe said more than 85 per cent of survey responses had come before the latest developments in Cyprus, whose leaders are scrambling to strike a bailout deal with international lenders to avert a banking collapse and sovereign default. David Brown of New View Economics said the survey suggested “the bells are starting to toll in Germany that the eurozone crisis is about to hit recovery prospects again.

“The biggest risk right now is that euro contagion is once again uncaged and ready to rip through the heart of economic confidence,” he said.

The Ifo data, which followed on from a modest PMI survey on Thursday that showed Germany’s business expansion lost steam in March, sent the euro to a two-week low against the yen.

But most economists still expect Germany to skirt recession and regain economic momentum as 2013 progresses.

Germany shrugged off the first two years of the eurozone crisis with solid growth, gaining the sobriquet “Teflon economy”. But weakness in its main trading partners weighed in the fourth quarter, causing it to shrink by 0.6 per cent.

Wohlrabe said he expected a bounce-back to growth in the first quarter and in the year as a whole. The government expects economic growth of 0.4 per cent this year after 0.7 per cent in 2012.