German May Business Confidence Weakens; Domestic Spending Boosts Q1 Growth

(RTTNews) - Confidence among German firms deteriorated more-than-expected to a five-month low in May, signaling growth may ease in the second quarter.

A detailed report from Destatis today showed that the Germany's economic growth rebounded in the first quarter as initially estimated, solely driven by domestic demand.

The business confidence index fell to 110.4 in May from 111.2 in April, a monthly survey of 7,000 firms, conducted by Ifo Institute showed Friday. The score was forecast to drop to 110.9.

Companies were also less optimistic about future business developments and a lull was seen in the German economy in May.

The current conditions index dropped to 114.8 from 115.3 in the previous month, while it was forecast to rise to 115.4. Expectations among businesses also declined in May, and the index fell to 106.2 in May from 107.3. The reading was below the consensus of 106.5.

Confidence among manufacturers weakened slightly in May, but remained at a high level. After a sharp increase, confidence in wholesaling declined markedly. Sentiment among contractors also decreased due to the weakness in current and future expectations.

In the service sector, the business climate index deteriorated to 21.4 in May from 22.1 in April. While assessments of the current business situation were less favorable than last month, outlook was more optimistic.

The renewed fall in the Ifo business climate in May suggested that the recovery may now be slowing, Jennifer McKeown, a senior European economist at Capital Economics said.

The European Central Bank will probably be rather less relaxed about the Ifo setback, since the economy elsewhere in the Eurozone is not resilient enough to balance out the external risks, Joerg Kraemer, chief economist at Commerzbank said.

Destatis said quarterly growth in gross domestic product doubled to 0.8 percent from 0.4 percent in the fourth quarter. The rate came in line with the provisional estimate published on May 15 and marked the fastest expansion in three years.

One of the reasons for this rebound at the start of the year was the extremely mild weather. Bundesbank, early this week said, growth will slow in months ahead after mild weather boosted expansion in the first quarter.

On a calendar-adjusted basis, GDP grew 2.3 percent year-on-year, faster than the 1.4 percent rise seen in the fourth quarter. This was the largest increase in over two years. The statistical office confirmed the annual figures.

Gross fixed capital formation advanced at a faster pace of 3.2 percent from the previous quarter, when it gained 0.7 percent. Companies increased their investment as interest rates are too low.

Household final consumption expenditure increased 0.7 percent. At the same time, general government expenditure grew only 0.4 percent.

However, the balance of exports and imports had a downward effect on the GDP growth. The increase in exports slowed to 0.2 percent from 2.5 percent, while the increase in imports accelerated to 2.2 percent.

The European Commission projects the biggest euro area economy to grow 1.8 percent this year and 2 percent in 2015.