10/19 08:48 European Economies: German Business Confidence Slides (Update2) By Christian Baumgaertel

Munich, Oct. 19 (Bloomberg) -- German business confidence posted the biggest drop in almost 28 years in September, the Ifo institute's survey of 7,000 companies showed, a sign Europe's largest economy may shrink after terrorist attacks on the U.S.

``We expect a great economic setback,'' said Isabelle Parche, the chief financial officer of machinery maker Winkler + Duennebier AG, which said this week it will eliminate 300 jobs. ``There's absolutely no readiness to invest in the U.S. and that will hurt investment in Europe.''

Siemens AG, Opel AG and Commerzbank AG said this week they'll fire a total of 12,000 people. Germany's economy will expand about 0.75 percent this year, less than half the pace predicted six months ago, Finance Minister Hans Eichel said. The benchmark DAX stock index has lost about 30 percent this year.

Ifo's index of executive confidence in western Germany declined to 85.0 from 89.5 in August. That's the biggest decline since November 1973, the month after the Yom Kippur Arab-Israeli war. Economists predicted a decline to 88.4.

``You hear of job cuts around the world -- I don't know where the turnaround is going to come from,'' said Ferdinand von Ballestrem, chief financial officer of truckmaker MAN AG. The European Central Bank will have to lower interest rates ``sooner or later,'' he said.

The ECB has lowered the price of money three times this year, most recently on Sept. 17, by half a point to 3.75 percent. The U.S. Federal Reserve reduced rates nine times and the Bank of England six times. Policy makers meet on Thursday.

Global Slump

Today's report confirms expectations of an economic slowdown after the Sept. 11 attacks, ECB council member Ernst Welteke said today. Still, ``I do not believe'' the German economy will shrink, he added. Fellow council member Eugenio Domingo Solans said ``interest rates now aren't an obstacle to growth.''

The Ifo index is at its lowest level since November 1993. The euro fell to 89.84 U.S. cents after the report, from as high as 90.36. The yield on the 3 3/4 percent German note maturing in 2003 fell 7 basis points to 3.30 percent.

The world's three largest economies are either stagnant or shrinking. The biggest economy faces an ``uneven'' recovery from the attacks, U.S. Federal Reserve Chairman Alan Greenspan said on Wednesday. Japan is in its fourth recession in a decade.

Morgan Stanley Dean Witter & Co. Chief Economist Stephen Roach cut his global growth forecast for next year to 1.9 percent from 2.1 percent, the second reduction in a month. His earlier prediction was 3.4 percent.

`Recession Territory'

Germany accounts for a third of the economy of the dozen countries that share the euro. It's the biggest trade partner of neighbors such as France and the Netherlands. American companies purchase about 14 percent of Europe's exports and are the biggest foreign investors in the region.

Valeo SA, Europe's largest publicly traded car-parts maker, said today it plans to close 12 plants and cut as many as 5,000 jobs to make up for slowing demand from carmakers for components.

Munich-based Ifo, which is 50 percent funded by the government, writes to executives each month to ask them about production, inventories, orders, prices and jobs. The index peaked at 107.3 in November 1990. The low was 75.7 in 1982.

Money in Europe will be at least a quarter point cheaper by the end of the year, futures trading suggests. The yield on the three-month Euribor interest rate futures contract maturing in November fell 5 basis points to 3.45 percent. The March contract yield declined 7 basis points to 3.13 percent.

``Germany is very clearly in recession territory,'' said Sharda Dean, an international economist at Merrill Lynch & Co. in London. Germany is the world's third-largest economy.

European Economies

Germany's economy didn't grow at all in the second quarter. Figures for cargo show that exports, which account for about a third of gross domestic product, were disrupted by the terrorist attacks. Cargo traffic at Frankfurt airport fell 13 percent in September, according to the airport's owner, Fraport AG.

The dozen nations that share the euro grew 0.1 percent in the second quarter, and ECB council member Arnout Wellink said Wednesday GDP may shrink in the second half.

The U.S. economy grew at its slowest pace in eight years in the second quarter. It probably shrank at a 0.5 percent annual rate in the third quarter and will shrink 1 percent in the final quarter, economists surveyed by Bloomberg News forecast, as business and consumer confidence decline.

Economists have pared their 2002 growth forecasts for the 12 countries using the euro by a third after the attacks to 1.6 percent, a Bloomberg News survey of 23 economists showed. Before Sept. 11, forecasts were for growth of 2.4 percent.

The VCI Chemical Industry Association on Thursday more than halved its sales growth forecast for this year, while the ZDB builders association said it expects the eighth straight year of recession in the building industry next year.

Job Losses

European companies have announced almost 70,000 job cuts since Sept. 11, according to a tally of announcements. Efforts to bring down European unemployment stalled in August, and jobless lines in Germany have grown in all but one month this year.

The European Commission said the ECB ``probably'' has room to buoy the economy by cutting rates. Finance ministers from Belgium, France and Austria have also urged the bank to lower borrowing costs.

-- Guy Daley (guydaley1@netzero.net), October 19, 2001