A closely watched survey Tuesday showed German business confidence dropped for the first time in 10 months in February, with the retail sector especially hurt by harsh winter weather.
The Munich-based Ifo institute's business confidence survey said its business climate index fell to 95.2 points from 95.8 points in January.
"Responsible for this decline is especially the situation in retailing, which experienced a setback in February," Hans-Werner Sinn, the Ifo's president said in the group's report.
"On the whole, the firms have assessed their current business situation somewhat more unfavorably than in the previous month. They regard their business outlook for the coming half year slightly more favorably than in January. The economic recovery is expected to continue when winter is over," Sinn said.
The Ifo survey said manufacturers reported a largely unchanged climate in their business. The participants are somewhat more dissatisfied with their business than in the previous month.
For the coming six months, however, manufacturers are more confident about their business, with expectation of rising exports and a slowing of staff reductions, the survey said.
Germany, Europe's largest economy, is heavily dependent on exports which have declined in the downturn.
In construction, participants said their current business situation is better than in the previous month, but that the severe winter in Germany has constrained progress. The survey said construction industry participants were clearly more optimistic about their business expectations.
The wholesaling and retailing business climate, meanwhile, has cooled noticeably, the survey said. Participants from the retailing sector said their business situation worsened considerably in February, while their outlook for the future is more pessimistic. Less people went shopping during the month as the country experienced record cold and snowfalls.
Wholesalers are also more dissatisfied with their current business situation, but they are less skeptical regarding the six month outlook compared with January, the Ifo said.
"Today's slowing Ifo seems to be mainly driven by the strong winter and not by worsening outlook. Business expectations continue to improve," Carsten Brzeski, an economist at ING said in a note to clients.
"This also indicates that recent doubts about the German recovery on the back of public finance problems of other euro zone countries and a flat gross domestic product reading in the fourth quarter seem premature. The direct immediate macro-economic impact from the current fiscal crisis should be limited, and, in a way even positive. The weakening of the euro should actually help German exporters," Brzeski said.
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