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Germany ‘Island of Happiness’ No More; Confidence Falls

German business confidence came in lower than expected in May, adding to bad news from the euro zone's paymaster and knocking both European stocks and the euro lower on Thursday.

Brandenburg Gate, Berlin
Nikada | Vetta | Getty Images
Brandenburg Gate, Berlin

The Ifo business climate index — which starts from a base of 100 — was at 106.9 in May, down from 109.9 in April and compared with 114.2 in May of last year. It was forecast by economists surveyed by Reuters to have fallen to 109.4.

The euro hit a new 22-month low after the report was released, while European stocks, already paring gains on a bad manufacturing number, fell further.

Markit's manufacturing Purchasing Managers Index (PMI), released earlier on Thursday, showed that manufacturing contracted at its fastest pace in three years in Germany, sliding to 45.0 this month from April's 46.2.

Analysts said the big drop in the Ifo showed that previously resilient German businesses have finally lost their optimism.

"Until recently, it seemed as if the German economy had turned into an island of happiness. The Ifo had defied all euro zone crisis woes for more than half a year and growth returned strongly in the first quarter," ING economist Carsten Brzeski wrote in a market note.

Optimism was such that usually prudent Germans had "all of a sudden become a bunch of happy-go-luckies," with a recent study showing a huge majority expecting their lives to be better in the coming year, Brzeski added. "Today's Ifo index, however, is a clear signal that even the new German magnificence could come to an end."

The austerity-driven slowdowns in other euro zone countries, the cooking off of the Chinese economy, and the timid recovery in the U.S. mean Germany's exports are likely to fall, while hopes of domestic consumption could be easily disappointed, he added.

—By CNBC.com’s Antonia Oprita

Contact Europe: Economy

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