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German business morale weakens in January, views mixed on Trump impact

By Michael Nienaber

BERLIN (Reuters) - German business morale unexpectedly dropped in January, a survey showed on Wednesday, suggesting a more downbeat assessment of the outlook for Europe's largest economy, although analysts were split over the impact of a more protectionist US trade stance.

The Munich-based Ifo economic institute's business climate index, based on a monthly survey of some 7,000 firms, fell to 109.8 from 111.0 in December, confounding the consensus Reuters forecast for a slight improvement to 111.3.

U.S. President Donald Trump has unsettled German politicians and business leaders with his comments that Britain would not be the last country to leave the European Union and with threats to impose high tariffs on imports from China and Mexico.

The United States is Germany's most important single export destination.

"It did not even take a week for U.S. President Trump to put a dampener on the mood of German companies," Dekabank economist Andreas Scheuerle said.

He added that Trump's latest remarks made business leaders realize that growing protectionism was not just a theoretical threat.

ING economist Carsten Brzeski said in a note titled "Germany: First signs of being trumped" that the drop in the Ifo index suggested German concerns had grown about the economic implications of the new U.S. administration.

But Ifo economist Klaus Wohlrabe said that there were no clear signs of a Trump effect in the January survey, pointing to increased export expectations.

"The German economy made a less confident start to the year," Ifo chief Clemens Fuest said in a statement. The Ifo headline figure was the lowest since September.

Companies expressed a higher level of satisfaction with their current business situation, but they were less optimistic about their six-month business outlook.

The Ifo survey showed that business morale deteriorated in all four major business areas - manufacturing, construction, wholesaling and retailing - after hitting record highs in recent months.

The German economy grew by 1.9 percent last year, the strongest rate in five years, helped by robust private consumption, increased state spending on refugees and higher investment in construction.

The Economy Ministry on Wednesday confirmed its forecast for the economy to grow by 1.4 percent this year. It added the slowdown was mainly due to there being fewer workdays in 2017.

Ifo economist Wohlrabe confirmed the institute's forecast for economic growth of 1.5 percent in 2017.

With trade prospects subdued not only by Trump's protectionist policy plans, but also by Britain's decision to leave the EU, the German economy looks set to remain dependent on domestic demand this year.

"Particularly the construction sector should remain an important growth driver in 2017," Brzeski said.

"Maybe one of the few upsides of many uncertainties in traditional export destinations could be a rethinking or reorientation of the economy, finally leading to a kick-start of investments at home."

(Additonal reporting by Rene Wagner, Joseph Nast and Klaus Lauer; Editing by Hugh Lawson)