UPDATE 1-German business morale drops unexpectedly in October

Sarah Marsh
Friday, 25 Oct 2013 | 4:35 AM ET

* Sentiment index falls for first time in 6 months

* Drops to 107.4 vs forecast rise to 108.0

* Economists say Germany still on track to recovery

BERLIN, Oct 25 (Reuters) - German business morale dropped for the first time in six months in October but economists said the trend of a steady recovery in Europe's largest economy remained intact.

The Munich-based Ifo think tank said on Friday its business climate index, based on a monthly survey of 7,000 firms, fell to 107.4, missing the consensus forecast in a Reuters poll for a gain to 108.0.

The euro inched lower against the dollar following the release of the Ifo number, which compared with a reading of 107.7 in September and was the lowest since July.

"The political turbulence in the United States and Italy will likely have impacted the mood," said Joerg Zeuner, economist at KfW. "Nonetheless the upwards trend remains intact, Germany is still on a path to recovery."

Europe's economic powerhouse, which put in a stellar performance during the early years of the euro zone crisis, weakened last year but bounced back in the second quarter of 2013, when it grew by its strongest rate in more than a year.

The rebound was largely due to robust domestic demand and weather-related catch-up effects. Economists expect slower growth in the third and fourth quarters.

Although other sentiment surveys have shown investors and consumers more upbeat recently, the hard data have been mixed, with industry orders falling in August even though output rose.

The firms polled by Ifo were slightly more pessimistic about their current business conditions, with a sub-index falling to 111.3 from 111.4 in September. They were also more downbeat about future prospects, with a sub-reading on business expectations falling to 103.6 from 104.2.

"The German economy has not yet moved fully into gear," said Ifo economist Kai Carstensen.

The one bright spot in the release was a rise in manufacturing export expectations, to their highest value of the year, Ifo said.

A Purchasing Managers' Index (PMI) showed on Thursday that Germany's private sector grew at the slowest pace in three months in October.

But momentum in German economic growth is seen picking up next year. The German government said earlier this week it expected expansion of 1.7 percent in 2014 after 0.5 percent in 2013.

Major German companies were upbeat when reporting earnings this week. German luxury carmaker Daimler forecast higher fourth-quarter profit after posting better than expected results and business software firm SAP bucked the trend among rivals by keeping its 2013 profit forecast.

The German economy remains the envy of euro zone peers. Business activity in the currency bloc's second largest economy, France, all but stagnated in October.