German Business Confidence Rises More Than Forecast
German business confidence rose for a fifth month in August, suggesting Europe’s largest economy will gather strength after shaking off its worst recession since World War II.
The Ifo institute in Munich said its business climate index, based on a survey of 7,000 executives, increased to 90.5 from 87.4 in July. That’s the highest reading since September last year. Economists expected a gain to 89, the median of 41 forecasts in a Bloomberg News survey showed. The index reached a 26-year low of 82.2 in March.
Germany’s economy unexpectedly expanded 0.3 percent in the second quarter as improving global trade boosted demand for exports and the government’s 85 billion-euro ($122 billion) package to stimulate domestic spending started to kick in. Bundesbank President Axel Weber said last week that, while he’s “not yet convinced” the recovery can be sustained, third- quarter growth may be “better than thought.”
“The third quarter has all ingredients for another growth surprise,” said Carsten Brzeski, an economist at ING Group in Brussels. “The German economy steered out of recession faster than some pessimists had thought. However, any credit crunching and job shedding are clear speed limits to the recovery.”
The euro rose a quarter of a cent on Ifo’s report before easing back to $1.4308 at 10:50 a.m. in Frankfurt. The yield on the 10-year German benchmark bond fell three basis points to 3.25 percent.
Expectations Jump
Ifo’s measure of expectations increased to 95 from 90.4, while a gauge of current conditions rose to 86.1 from 84.4. Investor confidence jumped to the highest level in more than three years this month and the benchmark DAX share index reached an 11-month high yesterday.
German Chancellor Angela Merkel’s government, which faces a national election in September, is trying to rekindle growth with a spending package that includes tax breaks and a 2,500- euro payment for consumers who scrap their old car and buy a new one. The Economy Ministry has indicated its forecast for a 6 percent economic contraction this year may now be too pessimistic.
“Minus 6 percent is too negative,” Ifo economist Gernot Nerb said in an interview with Bloomberg Television. Rising expectations among exporters indicate manufacturing should improve, he said.
Fiscal Stimulus
BASF SE, the world’s biggest chemical company, said on Aug. 20 that demand is stabilizing and it has fewer employees at its main German plant on shortened working hours.
Volkswagen AG this month raised its full-year sales forecast after the “cash-for-clunkers” program helped spur demand for its Golf and Polo compacts. Deliveries may fall 5 percent this year, half the decline previously estimated, Europe’s largest carmaker said.
“The fiscal stimulus measures expire next year, that’s the problem,” said David Kohl, deputy chief economist at Julius Baer Holding AG in Frankfurt.
The Bundesbank expects unemployment to rise to 10.5 percent in 2010 from 8.3 percent today as companies cut costs to restore profit. That may damp consumer spending and undermine the recovery.
European Central Bank policy makers have stressed the heightened degree of uncertainty over the economic outlook and indicated they won’t rush to withdraw emergency measures to prop up the economy.
The ECB has cut its benchmark interest rate to a record low of 1 percent, flooded banks with cash and started buying 60 billion euros of covered bonds in an effort to revive lending.
“We see some signs confirming that the real economy is starting to get out of the period of freefall,” ECB President Jean-Claude Trichet said at the U.S. Federal Reserve’s annual symposium in Jackson Hole, Wyoming, on Aug. 22. This “does not mean at all that we do not have a very bumpy road ahead of us.”