German business morale deteriorated more than expected in May as confidence in the services sector worsened, a survey showed today.
The new data suggest that Europe's largest economy is losing steam after solid growth at the start of the year.
The Munich-based Ifo institute said its closely watched business climate index fell to 97.9 in May. This was the lowest reading since November 2014 and clearly missed the consensus forecast for a reading of 99.1.
"The German economy is still lacking in momentum," Ifo President Clemens Fuest said.
In the services sector, business climate took a "substantial hit", Fuest said, with the sub-indicator of current sentiment in services posting its biggest monthly drop since April 2013.
Ifo economist Klaus Wohlrabe said a slowdown in manufacturing was now spilling over to services as transport and logistics firms, that depend on contracts from industrial companies, reported steep declines in confidence.
While business morale in wholesale trade deteriorated, retailers were more upbeat about both their current conditions and business outlook, the survey showed.
This suggests that consumer spending could remain robust in the second quarter despite the overall decline in services sentiment.
Domestic demand has become the main pillar of economic support, providing a buffer against external shocks such as US President Donald Trump's 'America First' trade policies and Britain's chaotic departure from the European Union.
German shoppers have been opening their wallets as they are benefiting from record-low borrowing costs, historically high levels of employment and inflation-busting pay hikes.
The Ifo survey also showed that the business climate in construction improved for the third time in a row as already upbeat assessments of the current business situation improved further.
"The construction boom continues," Fuest said.
The survey followed economic data released earlier today that showed household spending rose at its strongest pace in eight years, driving a rebound of 0.4% GDP quarter-on-quarter growth in the first quarter.
A pick-up in construction activity and surprisingly solid exports also helped the economy to get back on track in the first three months of the year.
The German economy avoided a recession by a whisker at the end of last year after a 0.2% contraction in the third quarter and a stagnation in the fourth.
"The ongoing trade conflict between the US and China is a clear headwind for the already battered export sector," ING economist Carsten Brzeski said.
A separate survey from IHS Markit among purchasing managers showed that activity in Germany's services and manufacturing sectors fell in May, reflecting the toll that unresolved trade disputes are having on the economy.
However, signs that the worst may be over for German manufacturers were evident in a slower contraction in output, new orders and export sales, the survey showed.
"It looks like the manufacturing downturn has passed its peak and is moving towards a period of stabilisation but there is still a long way before we return to growth in the manufacturing economy," Markit economist Chris Williamson said.