October 25, 2019 / 8:34 AM / a month ago

UPDATE 2-German economy to grow in Q4 as business morale steadies - Ifo

* German economy is stabilising, Ifo says

* Uncertainty from Brexit remains high - Ifo economist (Adds economist comment, background)

By Paul Carrel and Frank Siebelt

BERLIN/FRANKFURT, Oct 25 (Reuters) - German business sentiment held steady in October, and Europe's largest economy should grow moderately in the final quarter after contracting earlier in the year, the Ifo economic institute said on Friday.

Ifo said its business climate index was unchanged from the prior month in October at 94.6. That was just above the consensus forecast for 94.5.

"The German economy is stabilising," Ifo President Clemens Fuest said in a statement.

Europe's economic powerhouse shrank in the second quarter, and many economists expect it to have done so again in the third. That would put it in recession - usually defined as a period of at least two consecutive quarters of contraction.

But Ifo economist Klaus Wohlrabe told Reuters: "For the fourth quarter, we expect a slight expansion."

Wohlrabe said the downtrend in German industry, which is heavily exposed to fluctuations in global trade, has stopped for the time being, but he added: "The uncertainty stemming from Brexit remains high."

Germany's export-reliant economy has been suffering from slower global growth and business uncertainty caused by U.S. President Donald Trump's 'America First' trade policies and Britain's planned, but delayed, exit from the European Union.

German sportswear group Puma said on Thursday it would take a hit from U.S. tariffs on China in the fourth quarter but still raised its sales forecast.

Ifo's index on current conditions fell to 97.8 from 98.6 in September. But its expectations index rose to 91.5 from 90.9.

"Relief, unfortunately, is not the same as a rebound," ING economist Carsten Brzeski said of the stabilisation in morale.

"The risk of a long flirt with stagnation remains high and with it the risk of a Japanification of the German economy."

ECB Vice President Luis de Guindos said earlier this month the bank must fight the spectre of 'Japanification' - the risk of replicating Japan's 'lost decades' of low-to-no growth and self-fulfulling expectations of low inflation or grinding deflation.

With the ECB already deploying massive monetary stimulus, Chancellor Angela Merkel's coalition government has faced pressure from other governments and economists to deploy more fiscal stimulus.

Finance Minister Olaf Scholz, a Social Democrat, said last month that Germany is ready to pump billions of euros into its economy to counter any significant reduction in growth.

But Merkel and her conservatives are sticking firmly to their balanced-budget policy and have resisted calls for a stimulus package to counter the slowdown. (Reporting by Paul Carrel and Frank Siebelt; Additional reporting by Michelle Martin and Tassilo Hummel; Editing by Hugh Lawson)

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