German business mood worsens despite ECB bond plan

German business sentiment dropped for a fifth straight month in September to its lowest since early 2010, raising fears of recession and underlining that a bold bond-buying plan laid out by the European Central Bank is no economic elixir.

Germany's relative resilience to the euro zone crisis has been steadily fraying as its firms see falling demand for their products from key European partners and signs of a slowdown in other markets.

Earlier this month ECB chief Mario Draghi announced a new and potentially unlimited bond-buying program to lower the borrowing costs of embattled euro zone countries such as Spain but market optimism has not spread to company boardrooms.

The Munich-based Ifo institute said its business climate index, based on a monthly survey of some 7,000 firms, fell to 101.4 in September from 102.3 in August, defying expectations for a slight rise.

A Reuters poll of 45 economists had forecast the index at 102.5.

"Today's Ifo index shows that German companies remain skeptical about the economic impact of Mario Draghi's magic," economist Carsten Brzeski of ING Bank said.

"Despite fears of a looming Eurozone break-up clearly fading away, German businesses are downscaling their expectations. The German economy could see a contraction in the third quarter."

In a report published after the Ifo numbers on Monday, the Bundesbank did not go that far, saying that the economy should continue its overall upward trend at the start of the third quarter. But it also underlined the "great uncertainty" over future prospects.

"The domestic economic situation is so far robust, but signs of weaker dynamics are noticeable," the German central bank said.

Dutch business confidence also fell in September to -6.7 points from -4.6 in August, adding to signs that the euro zone's stronger "core" economies are succumbing to the downturn.

While they have not been punished by debt markets like much of the euro's southern half, both Germany and the Netherlands have slashed public spending to secure the future of public finances.

"The drop in Ifo business confidence is a potent reminder that the outlook for the German and Eurozone economies still hangs in the balance," said Holger Schmieding, German economist at investment bank Berenberg.

"Further policy steps to contain the Euro crisis may be needed for the Eurozone to turn the corner."