German business confidence takes surprise dip

German business confidence fell in October after rising for five months, amid worries over the strength of the recovery and political uncertainty as Chancellor Angela Merkel tries to form a coalition government.

The Ifo economic institute's business climate index -- a key measure of the mood in the industry and trade sectors of Europe's biggest economy -- fell to 107.4 points from 107.7 in September.

Analysts had expected that sentiment would continue to pick up among businesses after the German economy started to recover this year after being pummelled by the effects of the eurozone debt crisis.

Analysts polled by Dow Jones Newswires had forecast a rise to 108 points.

"Firms assessed their business outlook slightly less optimistically than last month," said the think-tank's economist Kai Carstensen.

"Assessments of the current business situation were somewhat less positive, but remain above average. The German economy has not yet moved fully into gear."

ING economist Carsten Brzeski said that despite the fall, "the German economy remains in good shape. The solid labour market and recovering industrial activity bode well for stable growth in the coming quarters."

But he said said "the drop is a good reminder that German invulnerability might not last forever."

Germany's government forecast this week that the economy will expand 0.5 percent this year and 1.7 percent in 2014.

Ifo calculates its headline index on the basis of companies' assessments of current business and the outlook for the next six months.

The sub-index measuring current business fell slightly to 111.3 points from 111.4 in September, while the outlook sub-index dropped more sharply, to 103.6 from 104.2 the previous month.

Annalisa Piazza of Newedge Strategy said the "softer-than-expected" data suggest "a general sense of uncertainty surrounding the recovery scenario".

But she pointed out that "the index remains well above its long-term average of 101" and blamed Germany's "still uncertain political scenario" for the temporary dip.

Merkel's conservatives and her defeated September 22 election rivals the centre-left Social Democrats have launched talks expected to drag on for weeks on hammering out a 'grand coalition' government.

Berenberg Bank senior economist Christian Schulz also said that the "domestic outlook became a little less buoyant" after the election.

Merkel's march toward a left-right alliance "guarantees a gradual further shift towards centre-left policies," he wrote.

"The prospect of higher taxes for entrepreneurs and tighter labour rules, including new minimum wages, may have dented companies' optimism."

However Schulz, like other analysts, remained broadly upbeat, saying that "despite some post-election softness, Germany is on track for healthy growth at the end of 2013.

"The fading of the euro crisis, low borrowing costs and strong fundamentals support domestic demand."