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Ukraine Tensions Weigh on German Economy

Geopolitical tensions and the continuing standoff in Ukraine are exacting a toll on German business confidence, which dropped more than economists had predicted to its lowest level since October.

The German business climate index, lead indicator of the Munich-based Ifo Institute for Economic Research of Europe’s largest economy, declined to 108.0 for this month from 109.7 in June, marking the third successive monthly decline. Analysts had expected a more modest dip to 109.4.

The index is based on about 7,000 survey responses from firms across Germany in manufacturing, construction, wholesaling and retailing. “Geopolitical tensions are taking their toll on the German economy,” said Ifo president Hans-Werner Sinn in an accompanying statement. The drop was across the board, with assessments of the business climate falling in each of the four main industry sectors.

The data follow more upbeat readings from surveys of German purchasing managers, which were all better than expected and suggested that Germany’s economy may be recovering from a likely flat second quarter. The Deutsche Bundesbank reported earlier this week that after 0.8% growth in Germany’s gross domestic product (GDP) in the first quarter of 2014, Q2 could show little or no change.

The Bundesbank predicts the German economy will grow by 1.9% this year, 2% in 2015 and 1.8% in 2016. That compares with European Central Bank (ECB) forecasts for the euro area of 1% this year, 1.7% in 2015 and 1.8% in 2016.

There was better news from the UK, where the first estimate of growth for Q214 came in at 0.8% to match the figure for Q1. Britain’s economy finally recouped the losses caused by the 2008 financial crisis to surpass its pre-recession peak by 0.2% in the latest quarter.

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