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German Business Confidence Falls

German economy’s psychological environment has worsened.German economy’s psychological environment has worsened.

A closely-watched survey of business confidence in Germany, Europe’s largest economy, dropped in January as managers worried about the uncertainty associated with the advent of Donald Trump’s presidency.

The Ifo index released Wednesday fell to 109.8 points in January from 111 points in December, as companies’ greater satisfaction with their current situation was offset by a drop in their expectations, AP reported.

The Ifo report could raise concern that heightened political uncertainty will damp Germany’s economic prospects after growth in 2016 accelerated to the fastest pace in five years on the back of domestic spending. While the Bundesbank predicts job creation will continue to increase strongly, a gauge measuring private-sector activity slipped in January.

ING economist Carsten Brzeski noted that 10% of German exports go to the US, helping make it Germany’s single most important trade partner, and businesses are “getting increasingly concerned about the possible impact from US President Trump’s suggested trade sanctions.”

He said the British pound’s steep decline and Brexit uncertainty are contributing to fears. 

The survey is based on 7,000 responses from firms across sectors.

Germany is heading into a potentially turbulent year, with a general election in September set to pit the ruling party of Chancellor Angela Merkel against a strengthening populist movement. The start of formal talks about Britain’s exit from the European Union and the risk in trade disruption from the new US administration under Donald Trump could also weigh on sentiment in the trade-oriented economy, Bloomberg reported.

“Weakness in manufacturing is especially eye-catching and this probably has something to do with Trump and related fears of German exporters,” said Andreas Rees, an economist at UniCredit Bank AG in Frankfurt. “If you look at the fundamentals of the German economy, it looks really healthy, but the psychological environment has worsened and it remains to be seen whether it will develop into something more fundamental.”

The euro was little changed after the reports and traded at $1.074 in Frankfurt.

A measure of current economic conditions rose to 116.9 from a revised 116.7, according to Ifo. Its gauge of expectations deteriorated to 103.2 from 105.5. 

Meanwhile, German business leaders will pressure Angela Merkel into agreeing a free trade deal with Britain within the next two years because they cannot afford an economic battering from export tariffs, a leading Brexiteer has said.

Former minister and top eurosceptic Owen Paterson, who was in Berlin last Saturday, said industry chiefs in Berlin had told him that they will push their under-fire Chancellor to put in place the framework for a free trade deal within the two-year period granted by Article 50 for official divorce talks.

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