Fears about eurozone hit German economy

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German business sentiment dipped in May and private sector growth slowed as the eurozone debt crisis darkened the outlook for Europe's largest economy.

Fears about the eurozone have brought a huge dose of uncertainty into the prospects for business. But by exacerbating a sharp fall in the euro, they are also boosting German exports' competitiveness outside the single currency zone.

"We are seeing a tug-of-war between two factors," said UniCredit economist Andreas Rees. "On the one hand, you have a weaker euro and strong growth in Asia, which is positive. On the other hand, companies are facing a huge amount of uncertainty due to the debt crisis."

The Ifo think-tank said its business climate index slipped to 101.5 from 101.6 in April, bucking expectations for a rise. The fall was the first since February. Germany exited its deepest post-war recession in the second quarter of last year but the recovery slowed in the winter when severe weather disrupted business activity.

The Federal Statistics Office confirmed yesterday that GDP grew 0.2 per cent in the first quarter. However, the weaker PMI reading raised concerns about the economic outlook beyond the second quarter. A flash estimate of the Markit Composite PMI index, which surveys the service and manufacturing sectors, fell to 55.5 from 59.3 in April, but remained above the key 50 mark separating contraction from expansion.

"It is quite worrying – this is the first time we have seen the debt crisis have an impact on economic growth," said Chris Williamson, chief economist at Markit. "Headlines about the collapse of the euro are definitely causing some uncertainty among consumers."