German Business Optimism Drops as Economy Nears Peak Growth

German business confidence unexpectedly weakened for a second month in September, in a sign that Europe’s largest economy is struggling to improve on its current brisk pace of expansion.

The Ifo Institute’s gauge of business sentiment dropped to 115.2 in September. While that’s still near a record high, it’s down from 115.9 in August and compares with a median forecast by economists for an increase to 116. The Bundesbank said this month that third-quarter growth momentum will be “slightly” lower than in the first half.

German businesses have been boosted by years of tailwinds from a weak euro and ultra-cheap borrowing costs, helping job creation that has cut unemployment to a record low and lifted consumer spending. Now they’re facing uncertainties as the economy grows near capacity, a strengthening euro threatens to weigh on exports, and European Central Bank discussions on slowing euro-zone stimulus increase bond yields.

“What we’re seeing is probably a peak, but not a turnaround and the assessment of the economic situation is a little bit more moderate than it was before,” said Jens Kramer, an economist at NordLB in Hanover, Germany. “This reading fits very well with our assessment that German economy is still going to grow at a robust and healthy pace, but probably not as strong as in the first half of the year.”

Ifo’s measure of current economic conditions worsened to 123.6 from a revised 124.7, and a gauge of expectations fell to 107.4 from a revised 107.8.

Other survey data on the German economy are signaling a robust outlook. Investor confidence surged the most in 10 months, snapping three months of declines, and a purchasing managers index published last week showed private-sector activity at the strongest in more than six years.

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Ifo’s report, based on 7,000 German companies, was carried out before the nation’s Sept. 24 election, in which the victory of Chancellor Angela Merkel’s Christian Democratic-led bloc was marred by a surge of support for the anti-immigrant Alternative for Germany party. The euro fell after that result, though the currency is still up more than 13 percent against the dollar this year.

“If there is one part of the economy that should be worried about the strength of the euro it’s the industrial sector,” Kramer said. “The assessment there has deteriorated so people may be thinking that the euro appreciation will go further from here, but that deterioration is not really that dramatic.”

— With assistance by Kristian Siedenburg, Andre Tartar, Steven Arons, and Jurjen Van De Pol