Economic Outlook

In its monthly survey released on Tuesday, the Ifo Institute for Economic Research's business climate index dropped for the third month in a row in August, edging down to 105.2 points from 106.4 points in July.

The Munich-based Ifo said turbulence on world financial markets in recent weeks had probably clouded executives' mood although they were generally optimistic about the economic upswing in Germany.

"The outlook for the coming six months is still marked by optimism, albeit somewhat weaker," Ifo president Hans-Werner Sinn said in a press release. "Here the turbulences in financial markets may have played a role."

Germany has borne the brunt of the European fallout from problems stemming from sub-prime US home loans. Earlier in the month, Germany's Sachsen LB bank and IKB bank almost collapsed, requiring major bailouts.

In an interview with Deutsche Welle, the director of the Hamburg World Economic Institute, Thomas Straubhaar, said that although the US home loans crisis had hit some institutions hard, Germany's "positive employment market" was strong enough to maintain the current business climate.

"The business climate is still robust," Straubhaar said. "Employment will continue to develop strongly, and the number of unemployed could fall to around the three million mark, potentially even lower."

Exports expected to drop

Ifo said the six-month outlook had weakened in the manufacturing sector and it also reported a fall in the business climate for exports, the motor of Europe's biggest economy.

"The optimism has also faded for the export business, despite the euro's decline in value," Ifo president Sinn said.

"Employment will also rise according to companies' plans but somewhat less robustly than foreseen in recent months."

In construction, the decline in the business climate index evident since the beginning of the year continued in August after the interruption in July.

The business climate in wholesaling has stabilized. The firms assessed their current situation slightly more pessimistically than in July, however with regard to the six-month outlook they are somewhat more optimistic.

For its monthly index, Ifo surveys some 7,000 companies across various sectors about their assessment of the current business climate and their expectation for the next six months.