German business morale dips

German business morale fell in July as concerns about high oil prices and a planned rise in sales tax dimmed expectations for Europe's largest economy. The Munich-based Ifo institute said on Wednesday its business climate index, based on a monthly survey of around 7,000 firms, fell to 105.6 from 106.8 in June.
The mid-range forecast in a Reuters poll was for a fall to 106.0 but some market participants had lowered their expectations after Belgian business morale figures this week. The fall in the index was the largest since March 2005.
"The first cracks are starting to appear in Germany's business confidence boom," said David Brown, an economist at Bear Stearns International. The Ifo index fell slightly in May but had risen in every other month this year.
"Persistently high oil prices, the strong euro, the ECB's aggressive rate tightening intentions and worries about a possible downturn in German growth due to next year's 3 percent VAT hike are all taking their toll", Brown said.
Chancellor Angela Merkel's coalition government plans to raise value added tax (VAT) by three percentage points to 19 percent from January 1 to shore up Germany's strained public finances.
Oil prices, which have trebled over the last three years, are also proving a problem for the economy. "We are still in an upturn but we have to face that there are problems now, mainly coming from the oil price," Ifo economist Gernot Nerb told CNBC. He said the European Central Bank should think "very carefully" about raising interest rates above 3 percent. The ECB is widely expected to raise its policy rate to that level with a 25 basis point hike on August 3.
Economy Minister Michael Glos said Germany's economic recovery remained on track. "Despite the slight decline in sentiment in July, the economic data show that our upswing is a robust one," he said in a statement. The Ifo survey followed reports on Tuesday showing business morale rising in France and the Netherlands in July but falling in Italy.
Belgian business morale pulled back from a record high in July, a report this week showed, causing the lowering of some market participants' expectations. The euro as a result ticked up against the dollar on the sentiment reading. "It is stronger than I thought," Citigroup economist Juergen Michels said.
German firms were not quite as upbeat as before about exports, Ifo said. Germany has relied heavily on strong exports to drive growth in recent years as high unemployment and weak consumer spending held back the domestic economy. German companies' latest earnings reports have been mixed.
An Ifo index on current conditions fell to 108.6 in July from 109.4, while an index on business expectations fell to 102.6 from 104.2. Both were slightly below expectations.
Recent reports on the broader economy have been varied. Figures released earlier this month showed industrial production rose by more than expected in May but a survey of investor expectations in Germany fell in July.