German Business Confidence Falls, As Euro-Zone Economy Contracts

German business confidence fell more than expected and Europe’s manufacturing and service sectors fell into contraction. The IFO institute survey of 7,000 executives showed that rising oil prices and the prospect of an ECB rate hike has greatly dimmed the outlook for German businesses. The survey declined to 101.3 from 103.5 in May as inflation has become more of a challenge, as it continues to weigh on consumer spending and increase input costs. Record oil prices which have risen to as high as $140 a barrel, have continued to squeeze company’s margins. Meanwhile, Europe’s manufacturing and service industries contracted sending the PMI composite reading down to 49.5 from 51.1 in May. The manufacturing index declined to 49.1 in June from 50.6 in May and the services index dropped to 49.5 from 50.6. The entire economic region is facing the same issues as German companies in rising inflation and the declining demand for exports due to a strong Euro. The ECB is expected to increase rates in the near-term as they stick to their mandate of price stability as inflation has risen to 3.7%- the highest in sixteen years. However, the slowing growth in the region may prevent the central bank from embarking on a series of rate hikes. - John Rivera, Currency Analyst.