German business morale clouds unexpectedly before election

BERLIN (Reuters) - German business confidence deteriorated unexpectedly in the weeks before Sunday's federal election, a survey showed on Monday, suggesting that a consumption-led upswing in Europe's largest economy could lose momentum in coming months.

The Munich-based Ifo economic institute said its business climate index, based on a monthly survey of some 7,000 firms, edged down to 115.2 from 115.9 in August. The reading compared with a Reuters consensus forecast for a value of 116.0.

The Ifo survey was conducted in the three weeks before the election in which Chancellor Angela Merkel won a fourth term but looks set to change coalition partners, meaning the indicator does not take into account the election outcome.

The drop in Ifo's headline figure was due to managers taking a more downbeat assessment of the current business situation as well as a more clouded business outlook for the next six months.

"We suspect that a more likely cause of the decline is the recent strength of the euro, rather than political uncertainty," Capital Economics analyst Stephen Brown said.

A sector breakdown of the Ifo figures showed the main drag came from manufacturing and wholesaling while sentiment improved against the trend in construction and retailing.

"In construction the index broke last month's record," Ifo said. A growing population, increased job security and record-low interest rates are fuelling a property boom in Germany.

Higher state spending on roads, bridges and social housing - also to accommodate an influx of more than one million migrants since 2015 - is giving the sector an additional push.

"STILL PERPLEXED"

Ifo's chief economist Klaus Wohlrabe said Sunday's election outcome could stoke uncertainty among business.

"At the moment people are still perplexed," Wohlrabe told Reuters, adding that a so-called "Jamaica" coalition between Merkel's conservatives with the pro-business Free Democrats (FDP) and the Greens would be difficult to achieve.

Wohlrabe said that new elections could not be excluded given the difficulty of forming a new government: "So uncertainty can certainly spread."

He added that the German economy would probably be weaker in the third quarter than the first two, but overall 2017 would be a very good year.

The German economy grew 0.7 percent on the quarter in the first three months of the year and 0.6 percent from April to June, driven by increased household and state spending as well as higher investment in buildings and machinery.

The Ifo index contrasted with last week's Purchasing Managers' Index (PMI) that showed Germany's private sector expanding at the fastest pace in almost six-and-a-half years in September.

The BDI industry association has said it expected the economy to grow by more than 2 percent this year adjusted for calendar effects, which would be the strongest pace in six years.

(Reporting by Michael Nienaber; Editing by Madeline Chambers)