German corporate sentiment deteriorated for the fourth month running in September, dropping to its lowest level since May 2005 as firms grew gloomy about their prospects after turmoil in financial markets.
The Munich-based Ifo economic research institute said this morning its business climate index, based on a monthly poll of around 7,000 firms, decreased to 92.9 from 94.8 in August, below a Reuters consensus forecast for a modest dip to 94.1.
The euro initially fell against the dollar, before rising on relief that the Ifo result was not worse.
"This reinforces our negative expectations about the economic situation in Germany in the coming months and next year," said Gernot Griebling at LBBW. "We can't disconnect ourselves from the negative developments stemming from the United States and the financial crisis."
The reading was the lowest since May 2005, when German dissatisfaction with high unemployment levels prompted then-Chancellor Gerhard Schroeder to call an early election.
The fall in the Ifo followed a plunge in French business confidence to its lowest level in over five years and a fourth straight drop in Italian corporate morale.
Ifo economist Klaus Abberger said about 40 per cent of the responses to the survey were received after the collapse of US investment bank Lehman Brothers and $85 billion rescue of insurer AIG sent shares and investor confidence sharply lower.
The new crises prompted the US government to unveil a $700 billion rescue package for the country's financial sector, but Germany and other European countries say they have no plans to replicate the US plan for their own institutions.
The German Bundesbank said earlier this week that the financial market turbulence would hit the earnings of Germany's big commercial lenders, its publicly-owned Landesbanks and its cooperative banks.
Tighter credit in the wake of the crisis could constrain household consumption and corporate investment, increasing the likelihood that the German economy will fall into recession this year after a 0.5 percent contraction in the second quarter.
"The European Central Bank should act now and think about an interest rate cut," Abberger told Reuters after the Ifo report was released.
Reflecting investor concerns, Germany's DAX index of leading companies has shed over 5 per cent in September alone.
The economic woes are likely to affect a wide range of sectors. European truckmakers meeting at a show in Hanover this week said a global slowdown was likely to put an end to a six-year boom in the industry.