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German June Business Sentiment Drops More than Expected

Business sentiment in Germany slipped in June from the month before, according to the closely watched Ifo index, but remained near historic highs as Europe's biggest economy kept growing.

The index, a barometer of where Germany's economy may be heading, declined to 107.0 from 108.6 in May, the agency said. That was lower than the 108.4 predicted by analysts polled by Dow Jones Newswires. It was the first time since March that it did not rise, but the figure still remains near the record high of 108.7 set in December 2006.

The 7,000 manufacturing, construction, wholesaling and retail companies that participated in the survey said both their current situation and expectations for the next six months were less favorable than in May, but Ifo President Hans-Werner Sinn said there was still strong evidence of optimism for the coming months.

"Both components of the business climate index are still at a high level and point to robust economic activity," he said in a statement.

The survey's current conditions level fell to 111.4 in June compared with 112.5 in May while expectations fell to 102.8 point from 104.8 points in May.

"Summing up, the end to the current upswing is not in sight," said Marco Valli, an analyst with HVB/Unicredit in Milan. "Fundamentals remain strong, the current rate level is not seen as an obstacle to growth, and currency appreciation has come to a halt."

The index has been buoyant recently as Germany enjoys a strong economic recovery, fueled by strong exports and rising consumer demand. The strengthening economy is one factor that led the European Central Bank to raise interest rates to 4% at its meeting earlier this month.

The dip in business confidence is not likely to cause the bank to scale back rates, with most analysts confident the bank will lift the rate to 4.25% at its September meeting.

The decline in business confidence comes on top of another survey earlier this that showed investor confidence slipping unexpectedly in June as well.

On Tuesday, the index of German investor sentiment released by the ZEW, or Center for European Economic Research, fell unexpectedly to 20.3 points in June compared to 24 points in May and 16.5 points in April.

Analysts polled by Dow Jones Newswires had expected the reading to come in at 29 points. Some blamed the slip on concerns that the ECB is likely to keep raising its main interest rate this year and a recent slide in share prices on the German stock exchange.

Like the Munich-based Ifo, the ZEW report said there was no cause for alarm or fears that Germany's economic turnaround was backsliding.

Tim Klein, an economist at Global Insight, said the decrease was not related to the 3 percentage point rise in the value-added tax that took effect in January, but "rather reflects factors such as the unexpectedly persistent renewed firmness of oil prices" and concerns about the rising strength of the euro on exporters.

"The economy will still grow strongly in 2007, but the time of repeated upward revisions to GDP forecasts is over now," he said.

The German government is forecasting growth of 2.3% this year, while the Paris-based Organization for Economic Cooperation and Development predicts 2.8% growth, matching the actual growth recorded in 2006. The Kiel-based Institute for the World Economy, or IfW, said last week it expects German growth to be 3.2% this year and 2.7% next year on strong domestic demand.