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IFO: German Business Confidence Slumps - 2001-10-19

A new survey shows business confidence has slumped in Germany during the past month, as Europe's largest economy is feeling the effects of the September 11 terror attacks in the United States. The latest news comes on top of a bad week for the German economy.

Industrial confidence in Germany has not been this bad in almost eight years. Data published by the German IFO economics research institute Friday shows the business environment here has nose-dived since September 11.

The IFO's business climate index for western Germany fell to 85 points in September from 89.5 one month earlier - and it has not been that low since November 1993.

It is measured against a basis of 100 for 1991. The IFO index is particularly sensitive because it measures not only companies' assessment of their current business, but also their expectations for the six months to come.

Analysts say the survey figures may be less alarming next month when the initial shock of the terror attacks has passed through the system.

But the news elsewhere in the German economy has also been bad this week - which in turn is almost certainly bad for the rest of Western Europe, because Germany in many ways drives the economies of the surrounding countries.

On Thursday, Finance Minister Hans Eichel admitted he was going to have to cut his growth forecast for next year to between 1.15 percent. That is about half the 2.5 percent growth he was forecasting until now.

And for this year, the German finance minister was even more pessimistic. In his latest forecast, he said he foresees growth in 2001 of just .75 percent. That is down from two percent previously.

Those new estimates in turn mean lower German government revenues and a bigger deficit at a time when European countries are pledged to try to balance their budgets in the next three to four years.

But many financial observers say this economic cloud is likely to have a silver lining. Lower growth forecasts, they say, will put pressure on the European Central Bank to follow the example of the United States Federal Reserve and cut interest rates further.