German business morale deteriorated unexpectedly in December after hitting an all-time high in the previous month, a survey showed yesterday, suggesting that political deadlock in Europe's economic powerhouse is clouding the outlook.
Chancellor Angela Merkel is struggling to form a stable government after her conservatives lost voters to the far right in September's election and her attempt at a tricky three-way alliance with two smaller parties failed last month.
The Munich-based Ifo economic institute said its business climate index, based on a monthly survey of some 7,000 firms, edged down to 117.2 from an upwardly revised reading of 117.6 in November which was the highest on record.
The December reading came in lower than a Reuters consensus forecast for a value of 117.5.
The slight drop in the headline figure was driven by managers' less optimistic business expectations while their assessments of the current situation were more positive.
Overall business morale remained on a relatively high level, Ifo chief Clemens Fuest said, adding: "German businesses are full of festive spirits."
Ifo economist Klaus Wohlrabe warned against over-interpreting the drop. "If the situation is already very good it is even more difficult to expect better business," he said.
Wohlrabe said that uncertainty among German businesses over the shape of the new government, which is likely to include Merkel's conservatives and the centre-left Social Democrats (SPD), had risen slightly.
Michael Holstein from DZ Bank pointed out that the December figure was still the second-highest Ifo reading on record, adding: "The German upswing will continue, 2018 is likely to be another year with a growth rate of more than 2 percent."
The Ifo institute said last week it expected an expansion of 2.6 percent next year as a broad upswing is generating record-high employment and buoyant tax revenues.
In another positive sign for the economy, the BGA trade association said it expected both German exports and imports to hit record highs in 2018, as companies in Europe's largest economy will continue to reap the benefits of a recovery in the United States, the European Union and China.
Exports are forecast to rise by 5 percent next year to hit a record high of 1.3 trillion euros ($1.53 trillion) while imports are seen growing by 7 percent to also reach a record of 1.1 trillion euros.
Merkel's hope of a tie-up with the SPD is her best chance to secure a fourth term in office.
Merkel's conservatives and the SPD are expected to meet on Wednesday to discuss the timetable and agenda of exploratory talks which will not start before early January.