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updated: 8/27/2012 8:43 AM

German business confidence down more than expected

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Associated Press

FRANKFURT, Germany -- German business optimism fell more than expected in August, according to the Ifo survey published Monday, another sign that Europe's largest economy faces trouble from the eurozone debt crisis.

The index fell to 102.3 points in August, down from a revised 103.2 in July. Market analysts had expected a smaller dip to 102.6 points.

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Economists have been warning that the debt crisis in the 17-country eurozone could eventually catch up with Germany. The country's economy has over the past few years done better than the currency union as a whole, which is struggling with a crisis over too much government debt and recessions in several countries. Germany grew 0.3 percent in the second quarter and unemployment remains low.

But the debt crisis is having an increasing impact on Germany as orders fall from its eurozone trading partners and businesses and consumers hold off on spending and investment out of fear of the future.

The Ifo index is based on a survey of 7,000 German businesses, which are asked about their views of current business conditions and their expectations for the next six months. While views of how things are now were only slightly more downbeat, expectations for the future darkened significantly across several sectors, including manufacturing and retailing.

"Enterprises are increasingly pessimistic about their business development," Ifo president Hans-Werner Sinn said in a statement. "The Germany economy is weakening further."

Troubles elsewhere are starting to make themselves felt. Italy and Spain, the No. 3 and No. 4 eurozone economies, are in recessions as they try to reduce budget deficits and struggle to refinance their debts in bond markets. Greece, Portugal and Ireland have been bailed out by loans from other eurozone countries.

So far, exports of cars and industrial machinery to growing economies in Asia and the United States have helped Germany grow, while low unemployment has buoyed consumer spending at home. But those advantages may not be enough for much longer against the undertow from the eurozone crisis.

"Exports and domestic consumption have shielded the German economy against the euro crisis virus up to now," ING analyst Carsten Brzeski wrote in a note to investors. "This immunity, however, has been crumbling away quickly over recent months. As a consequence, it looks as if the German economy will, at best, be treading water in the coming months."

He said the evidence points to a contraction of the economy in the third quarter of the year. "However, let's be clear, given the sound fundamentals of the economy, any contraction should hardly feel recessionary in Germany," he said.

Andreas Rees, chief German economist at UniCredit Research in Munich, said "psychological headwinds" were playing a role. Germany's job market is still strong, and some workers have won big raises, most notably a 4.3 percent raise won by the biggest industrial workers union, IG Metall. That should boost consumer demand in stores, yet retailers were more pessimistic in the survey.

"Fears about the eurozone crisis were obviously outweighing these positive factors," Rees said.

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