Associated Press
08.26.2004

German business confidence dipped in August, a drop that underlined worries about the strength of the country's recovery even as Chancellor Gerhard Schroeder hailed a return to "considerable growth" in Europe's biggest economy.

The Ifo institute's monthly index slid to 95.3 from 95.6 in July, when it rose after two months of declines. Managers' assessments of their current situation improved, but their outlook for the next sixth months darkened amid higher oil prices and consumers' persistent reluctance to spend.

The economy grew by 0.5 percent from April through June from the previous three months - the best quarter-on-quarter growth in three years. Still, the upturn is being driven largely by Germany's traditional strength in exports.

"The recovery is really sluggish," Ifo economist Klaus Abberger said. "The spark from the very good export performance is not firing up domestic demand," he added - and no improvement is in sight.

Ifo polls executives at about 7,000 German companies for its index, which is a key economic indicator.

Their cautious outlook "shows the strain caused by the current high price of oil," David Milleker, an economist at Dresdner Bank in Frankfurt, said in a research note. He forecast that economic growth would slow in the second half of the year.

"The oil price is delaying the strengthening of domestic demand," Milleker said. "In the second half, foreign trade will no longer provide the kind of stimulus that was seen over the past 12 months."

Schroeder's government is forecasting that the economy will grow by between 1.5 and 2 percent this year. It shrank by 0.1 percent in 2003.

"We had stagnation for three years and now we have considerable growth figures for the first time - that is a success," Schroeder said in an interview with RTL television Thursday.

He pledged anew that he will stick to an unpopular package of reforms launched last year aimed at boosting the economy, including plans to trim benefits to the long-term jobless that have set off nationwide protests in recent weeks.

"Unpopular decisions have to be made if they are necessary for the future of the country," said Schroeder, whose Social Democrats are struggling in polls as they face three state elections next month.

"Of course the polls worry me, there's no question about that," he said. "But I can't, out of opportunism, go back on what I think is necessary."

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