German Business Confidence Tumbles To 11-month Low On Weaker Outlook

German business confidence eased sharply at the start of the year to its weakest level in eleven months, as global concerns such as market volatility and slowdown in the emerging economies hurt expectations significantly.

The Ifo business climate index dropped to 107.3 from 108.6 in December, which was revised from 108.7, the Munich-based Ifo Institute said Monday. Economists had forecast a 108.4 score.

The index slid for a second straight month and the latest reading was the lowest since February last year, when it was 106.8.

"The year started with an unpleasant surprise for the German economy," Ifo Institute President Hans-Werner Sinn said.

The current conditions index fell to 112.5, the lowest since March last year, from 112.8. Economists had expected the measure to hold steady.

The expectations index of the survey tumbled to 102.4 from 104.6, which was revised from 104.7. Economists were looking for a modest decline to 104.2. The January reading was the lowest in five months.

Morale in the factory sector fell to a 12-month low as manufacturers scaled back expectations significantly. While low oil prices benefited the chemicals sector, sentiment eroded in other segments such as automobile and mechanical engineering on the back of weaker export outlook.

In the construction sector, the business climate index continued to drop sharply, mainly due to the pessimism among contractors regarding the business outlook. Meanwhile, retailers turned optimistic regarding their future business during January.

"The refugees and the political reactions will remain topic number one in the coming weeks," ING Bank economist Carsten Brzeski said.

"However, today's Ifo index also shows that a scenario which dominated financial markets over the last weeks has finally entered German companies' boardrooms: it's the scenario in which extremely low oil prices could do more harm than good."

The German manufacturing sector grew at the slowest pace in eight months in January, partly due to the struggling oil industry, results of the latest Purchasing Managers' survey by Markit Economics revealed last week.

Investor sentiment was also hurt by the emerging market slowdown, forcing the ZEW economic sentiment indicator to fall in January for the first time in three months.

The German economy expanded 1.7 percent in 2015, according to Destatis, the most in four years as feeble inflation, record low unemployment and wage growth boosted household spending.

The International Monetary Fund, however, upgraded its growth projection for Germany last week. The biggest euro area economy is expected to log a 1.7 percent expansion this year and next.

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