2018.07.2508:35:00UTC+00German Business Sentiment Weakens On Trade Tensions

Germany's business sentiment weakened for the second straight month in July as escalating trade tensions with the U.S. weighed on firms' expectations, a closely watched survey showed Wednesday.

The business confidence index fell to 101.7 in July from 101.8 in June, survey data from the Munich-based Ifo Institute revealed. This was the lowest score since March 2017. The expected level for July was 101.5.

The German economy continues to expand, but at a slower pace, Ifo President Clemens Fuest said.

The Bundesbank this week said the largest euro area economy gained somewhat more momentum in the second quarter than at the start of the year. Private consumption remained a cornerstone of economic growth, the bank noted.

The Ifo index illustrates that the German economy continues its balancing act between solid economic fundamentals and fears about the possible impact from a potential trade war, Carsten Brzeski, an economist at ING-DiBa, said.

Tariffs on aluminum and steel by the U.S. will definitely not hurt the economy, the economist said.

And given traditional price insensitivity of German goods, even significant US import tariffs on cars might not significantly affect demand; particularly as long as the euro remains weak, Brzeski added.

According to Ifo, companies were slightly more satisfied with their current business situation, but scaled back their business expectations modestly.

The current conditions index came in at 105.3, above last month's 105.2 and the expected level of 104.9. Meanwhile, the expectations index dropped to 98.2 from 98.5, which was below consensus forecast of 98.3.

In manufacturing, business climate deteriorated for the sixth consecutive month due to far poorer assessments of the current business situation.

Business climate in the service sector improved reflecting upward revision in assessments of both current situation and business expectations.

Meanwhile, business climate in trade declined as traders were increasingly skeptical about their six-month business outlook.

On the other hand, the business climate index for the construction sector hit a new record high, boosted by its sharpest increase to date.