Fall in German business confidence stokes recession fears

German industrial conglomerate Thyssen Krupp has warned of economic uncertainty from its US markets. Photograph: Patrik Stollarz/AFP/Getty Images

German business confidence made its steepest drop this month since the aftermath of the Lehman Brothers collapse in late 2008, raising fresh doubts about the broader European economy as it grapples with a crippling debt crisis.

The Munich-based Ifo thinktank said on Wednesday its business climate index, based on a monthly survey of some 7,000 firms, fell to 108.7 in August from 112.9 in July, well below a consensus forecast in a Reuters poll of 42 economists for a 111.0 reading.

The last time the index fell so sharply was in November 2008, just after the collapse of Lehman Brothers when the German economy was in its deepest postwar recession. It was the lowest reading for the index since June of last year.

Ifo economist Klaus Abberger told Reuters that the slowdown of the US economy and twin debt problems in the US and Europe were the main reasons for the worsening outlook.

"The German economy has been infected," Abberger said. "I wouldn't speak of a recession at this moment. The companies still have a cushion of orders. And not every cooling results in a recession, but the recovery is slowing very significantly."

The German economy has been a pillar of strength since the debt crisis in the eurozone first broke out in Greece at the end of 2009.

But data last week showed gross domestic product (GDP) growth slowed to a meagre 0.1% in the second quarter of the year, pushed down by weakening private consumption and declines in the construction sector.

The Ifo index suggests the slowdown could be more precipitous than many economists had thought, removing a key crutch for the eurozone, whose vulnerable peripheral economies are depending on strong demand from their northern partners to help them out of their debt holes.

A weakening economy could make Germans more reluctant to splash out money to help countries like Greece, for whom a second rescue package was agreed by European leaders last month. That deal, which must be approved by national parliaments to go into force, has run into trouble over Finnish demands that Greece put up collateral to offset the loans it receives.