By Simone Meier
Aug. 28 (Bloomberg) -- German business confidence probably fell to the lowest level in almost a year in August after the rising cost of credit clouded the outlook for economic growth, a survey of economists shows.
The Ifo research institute's sentiment index fell to 105.4, the lowest since October 2006, from July's 106.4, according to the median of 36 forecasts in a Bloomberg News survey. The institute will release the figures, based on responses from 7,000 executives, at 10 a.m. in Munich today.
Contagion from the U.S. subprime mortgage debacle raised concern that companies will find it harder to borrow just as the economy of the 13 nations sharing the euro starts to lose momentum. German investor confidence fell to an eight-month low and growth in the region's manufacturing and service industries slowed in August.
``The best in terms of growth is probably behind us,'' said Sandra Petcov, an economist at Lehman Brothers International in London. ``If financial market turbulence were to affect lending, it could certainly have more serious repercussions on the economy.''
Ifo conducted the survey from Aug. 3 to Aug. 27, according to spokesman Andre Kunkel. Responses of about two-thirds of participants reflected the market turmoil, Kunkel said. The U.S. Federal Reserve cut the discount rate, at which it makes direct loans to banks, on Aug. 17 and global stocks rebounded.
Slowing Growth
Growth in the euro region slowed to 0.3 percent in the second quarter, the least since the end of 2004, from a 2006 peak of 0.9 percent. The slowdown was caused in part by the biggest drop in construction in a decade in Germany, Europe's largest economy.
For Europe, credit-market concern deepened Aug. 9 after several banks in the region acknowledged their vulnerability to increasing defaults on U.S. subprime mortgages, those to borrowers with a poor credit history. Landesbank Baden- Wuerttemberg, Germany's largest state-owned bank, on Aug. 27 agreed to buy Landesbank Sachsen Girozentrale after the public lender was bailed out.
European companies were already dealing with a stronger euro, making their goods less competitive abroad, a 17 percent increase in oil prices this year and higher interest rates.
The euro's 17 percent gain against the dollar in less than two years reduced the competitiveness of European exports at the same time as the housing slump curbed growth in the U.S. economy, the world's largest. The euro touched a record $1.3852 July 24.
BMW, Audi
Bayerische Motoren Werke AG, the world's largest luxury carmaker, on Aug. 1 reported a bigger decline in second-quarter profit than analysts had estimated because of the euro's strength. Audi AG, Volkswagen AG's luxury unit, said last month it expects lower earnings, partly because of currency swings.
Still, in its monthly report published Aug. 20, the Bundesbank said financial-market turbulence is ``no reason'' to change its view that the economic outlook is ``still favorable.''
European Central Bank President Jean-Claude Trichet yesterday refused to be drawn on the course of interest rates, saying the bank's council will decide at its Sept. 6 meeting. He didn't repeat his August call for ``strong vigilance'' on inflation, words he used to signal all eight of the bank's increases in the benchmark rate since late 2005. The rate now stands at 4 percent.
M3 money supply, which the ECB uses as a gauge of future inflation, probably accelerated in July, a Bloomberg survey shows. The ECB will release that figure at 10 a.m. today.
``If risk aversion continues to trend lower over the next week or so, then we'll definitely see a 25-basis-point rate increase by the ECB'' next month, said Michael Rottmann, an economist at Unicredit MIB in Munich.
Investors expect the ECB to raise borrowing costs once more this year, futures trading shows. The implied rate on the three- month Euribor contract for December settlement was at 4.42 percent yesterday.
The contracts settle to the three-month inter-bank offered rate for the euro, which has averaged 16 basis points more than the ECB's benchmark rate since the currency's start in 1999.
