Weak business morale from Germany, France, Italy points to slowdown

By Michael Nienaber

BERLIN (Reuters) - Business morale in Germany, France and Italy -- the euro zone's three biggest economies -- deteriorated in April as a stronger currency and capacity constraints limited output, signaling that growth in the currency bloc has reached its peak.

The euro zone was unexpectedly one of the best performers among major economies last year. But surveys suggest that growth has steadily slowed since January on euro strength and fears of a trade war between China and the United States.

German business confidence fell for a fifth consecutive month in April to reach the lowest level in more than a year, the Ifo institute said on Tuesday, suggesting that Europe's biggest economy is losing some steam.

"High spirits among German businesses have evaporated," Ifo chief Clemens Fuest said. "The German economy is slowing down."

The Munich-based Ifo institute said its new business climate index, which for the first time incorporated responses from the services sector, fell to 102.1 from 103.3 in March.

This was the lowest reading since March 2017 and came in weaker than a Reuters poll of analysts who had pointed to a less pronounced drop to 102.7.

Separate data from France's national statistics body on Tuesday showed that industrial morale in the euro zone's second-biggest economy dropped to 109 points in April, down from a revised figure of 110 points for March.

"There's definitely a slowdown, and the euro is not helping," said Ion-Marc Valahu, fund manager at Geneva-based firm Clairinvest.

"The European Central Bank is stuck in a corner. If they look to normalize rates, the euro will just shoot up and they're finding it hard to successfully talk down the euro."

In Italy, the euro zone's third largest economy, morale among businesses also fell amid political stalemate in the wake of inconclusive national elections seven weeks ago.

The surveys contradicted IHS Markit's composite flash Purchasing Managers' Index (PMI) for the euro zone, which was released on Monday and showed private sector growth held steady in April.

Oliver Rakau from Oxford Economics said the national surveys put the expected bounce-back of GDP growth in the second quarter into question after a soft patch at the start of the year.

"Combined with risks to the export outlook from rising trade tensions, the euro zone economy looks to be clearly past its growth peak," Rakau added.

CAPACITY LIMITS

Business morale in German manufacturing deteriorated for the third consecutive month but nevertheless remained at a high level, according to the Ifo survey, which is now based on the responses of some 9,000 firms.

"Companies are reaching capacity limits. Many firms cannot hike production and work through their orders because there's a shortage of staff," Ifo economist Klaus Wohlrabe told Reuters.

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In the service sector, the business climate index fell sharply as managers were far less optimistic about the next six months.

On the upside, business morale in construction hit a new record high as firms benefit from increased demand for real estate due to a growing population, record-low borrowing costs, rising real wages and a solid labor market.

The Ifo figures pointed to German gross domestic product growth of 0.4 percent in the first quarter, Wohlrabe said, adding: "The fifth drop in a row is a sign of normalization. We are far from a recession."

The Finance Ministry cautioned on Friday that growth could slow slightly in the first quarter after an expansion of 0.6 percent on the quarter in the final three months of 2017.

The International Monetary Fund last week raised its forecast for German economic growth, predicting a healthy 2.5 percent expansion this year.