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 programme 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 sceptical 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."
Dragging on the Ifo index was a sharp decline in sentiment among manufacturers, although companies in retailing and wholesaling reported a slightly brighter mood. Last week's ZEW survey also showed German analyst and investor morale picked up in September.
Tough austerity measures in many European states have weakened their appetite for German products and a weaker global economic environment is hammering demand from emerging markets.
Industrial group Bosch and steelmaker ThyssenKrupp , have announced plans to introduce "Kurzarbeit" or government-subsidised short-time work at German plants.
"The outlook has worsened and is the worse since May 2009,"
Ifo economist Klaus Wohlrabe told Reuters.
The index would have fallen further had it not been for a ruling by Germany's constitutional court on Sept 12 in favour of the ratification of Europe's permanent bailout fund. Half of the responses in the survey came before the ruling.
While the German economy steamed ahead in the first three months of the year, saving the euro zone from recession by growing 0.5 percent, it lost momentum in the second quarter, with growth slowing to 0.3 percent.
The Finance Ministry warned in its monthly report last Friday that data pointed to weaker growth in the remainder of the year. Many economists are now predicting a contraction for the third and possibly the fourth quarters.
Last week composite Purchasing Managers Index (PMI) showed Germany's private sector shrank for a fifth month, and a separate index for the euro zone showed that the ECB's aggressive new bond-buying plan has so far failed to inspire any major improvement in business at ailing euro zone companies.
However, economist Gerd Hassel said he believed news of the ECB's bond-buying plan had yet to fully sink in.
"I'm optimistic that the Ifo climate index will rise again in the coming months," he said.