German business morale deteriorated unexpectedly in December after hitting an all-time high in the previous month, a survey showed today.
This suggested that political deadlock in Europe's economic powerhouse is clouding the outlook.
Chancellor Angela Merkel is struggling to form a stable government after her conservatives lost voters to the far right in September's election and her attempt at a three-way alliance with two smaller parties failed last month.
The Munich-based Ifo economic institute said its business climate index, based on a monthly survey of some 7,000 firms, edged down to 117.2 from an upwardly revised reading of 117.6 in November.
The November figure had been the highest on record.
The December reading came in lower than a Reuters consensus forecast for a value of 117.5.
The slight drop in the headline figure was driven by managers' less optimistic business expectations while their assessments of the current situation were more positive.
Overall business morale remained on a relatively high level, Ifo chief Clemens Fuest said, adding: "German businesses are full of festive spirits."
Ifo economist Klaus Wohlrabe warned against over-interpreting the drop. "If the situation is already very good it is even more difficult to expect better business," he said.
Wohlrabe said that uncertainty among German businesses over the shape of the new government, which is likely to include Merkel's conservatives and the centre-left Social Democrats (SPD), had risen slightly.
Analysts said the December figure was still the second-highest Ifo reading on record, adding that the German upswing will continue and 2018 is likely to be another year with a growth rate of more than 2%.
The Ifo institute said last week it expected an expansion of 2.6% next year as a broad upswing is generating record-high employment and buoyant tax revenues.
In another positive sign for the economy, the BGA trade association said it expected both German exports and imports to hit record highs in 2018, as companies in Europe's largest economy will continue to reap the benefits of a recovery in the US, the European Union and China.
Exports are forecast to rise by 5% next year to hit a record high of €1.3 trillion while imports are seen growing by 7% to also reach a record of €1.1 trillion.
Merkel's hope of a tie-up with the SPD is her best chance to secure a fourth term in office.
Merkel's conservatives and the SPD are expected to meet this week to discuss the timetable and agenda of exploratory talks which will not start before early January.
