Ukraine, Middle East Weigh on German Business Confidence

The crises in Ukraine and the Middle East are eroding business confidence in Germany, Europe's top economy, a key indicator showed on Friday.

The Ifo economic institute's closely watched business climate index fell sharply to 108.0 points in July from 109.7 points in June -- the third drop in a row, to the lowest level since October 2013.

Analysts polled by Dow Jones Newswires had expected a smaller dip, to 109.4 points.

"Current business was seen as less good than in June and the outlook for future business was again less optimistic," the head of the Munich-based institute, Hans-Werner Sinn, said in a statement.

"Geopolitical tensions are putting strain on the German economy."

Ifo calculates its headline index on the basis of companies' assessments of current business and the outlook for the next six months.

The sub-index measuring current business slipped to 112.9 points from 114.8 points last month.

At the same time, the outlook sub-index fell to 103.4 points, a low point last seen in August 2013.

Wholesalers and retailers were particularly bearish, while companies in the construction industry were slightly less optimistic than in June.

Analysts said the report was cause for concern in Europe's powerhouse economy.

"July's drop in the German Ifo Business Climate Indicator is another worrying sign that the recovery may have passed its peak," senior European economist Jennifer McKeown at Capital Economics in London said.

But she pointed to a relatively positive report on German consumer confidence Friday as a ray of hope.

"Together with signs of rising wage growth in recent pay negotiations, this could add to hopes of a long-awaited consumer revival," she said.

Market research company GfK's monthly survey of consumer sentiment came in at its highest level since December 2006, driven by rising income expectations.

"Despite an escalation in the situation in Israel and Ukraine, German consumers remain optimistic this summer," GfK said.