Berlin trims forecast as business confidence rises
26 January 2006 , BERLIN - German business confidence unexpectedly gained ground in January, a survey of 7,000 executives released on Wednesday showed, underscoring industry leaders' optimism about the outlook for Europe's biggest economy. But faced with the prospect of Germany's key export machine slipping back a gear during the course of 2005, the release of the latest Ifo report coincided with the nation's Social Democrat-led government trimming its growth forecasts for the year. Nevertheless, German Ec
26 January 2006
BERLIN - German business confidence unexpectedly gained ground in January, a survey of 7,000 executives released on Wednesday showed, underscoring industry leaders' optimism about the outlook for Europe's biggest economy.
But faced with the prospect of Germany's key export machine slipping back a gear during the course of 2005, the release of the latest Ifo report coincided with the nation's Social Democrat-led government trimming its growth forecasts for the year.
Nevertheless, German Economics Minister Wolfgang Clement seized on the Ifo survey as further evidence to support the government's case that the nation's economy was now on a growth course.
"In Germany, it's heading upwards," Clement told a press conference in Berlin called to release the government's annual economic report.
"Germany has the potential for a long, sustainable economic recovery and also for a substantial reduction of unemployment."
German economic growth came in at 1.7 percent last year after slumping by 0.1 percent in 2003. Germany's Social Democrat-led government's annual economic report is now forecasting a growth rate in 2005 of 1.6 percent. Berlin had previously predicted a 2005 growth rate of 1.7 percent.
The Munich-based Ifo economic institute said its headline index for German business sentiment edged up to 96.4 points in January after recording a surprise jump to 96.2 points in December.
"The improved expectations indicate a continuation of the upswing, supported by somewhat stronger domestic demand," said Ifo president Hans-Werner Sinn releasing the report.
The January increase pushed the Ifo index, which is one of Europe's key economic indicators, to its highest level since February last year.
It also represented the Ifo's second consecutive monthly rise with the index having stood at 94.1 points in November.
The increase in the January Ifo was more than economists had forecast with analysts having predicted that the index, would dip to 96 points this month.
In addition to stronger domestic demand, the January rise came in the wake of the euro's retreat from recent record highs which also helped to ease concerns that the strong common currency might hit Germany's export-powered recovery. The euro climbed to a record 1.3667 dollars at the end of December after trading at 1.20 in September.
But the German government still expects the nation's export growth to ease back to 6.5 percent in 2005, after bounding ahead by 8.2 per cent in 2004, due largely to the impact of the strong euro and weaker global demand.
"The development of the US dollar's foreign exchange rate to the euro gives increasing reason for concern," the annual economic report said. "This could weaken the German economy's recovery."
"That is why all world economic players must cooperate to give fewer reasons for the dollar's current weakness," the economic report said.
The January increase in the Ifo index was driven by industry leaders' expectations, in particular in the hard-pressed retailing and building sectors of business trends further down the track. The index gauging future expectations increased to 97.6 from 96.5.
However, those responding to the January Ifo survey grew more pessimistic about the current business climate. The index measuring current business conditions dropped to 95.3 from 96.
While the government expects Germany's boom export sector to lose momentum in 2005, Clement told a press conference releasing the report that Berlin believes that domestic demand will pickup with private consumption growing at 0.7 percent and helping to compensate for a decrease in foreign orders.
Clement also went on to express optimism about the outlook for Germany's fragile labour market with the nation's long dole queues seen as having dampened consumer demand in recent years.
Data released earlier this month showed the number of people out of work in Germany in December rose to its highest level since 1997 with the jobless rate climbing to 10.8 percent from 10.3 percent.
While the number out of work in seasonally unadjusted terms jumped by 206,900 to reach 4.464 million in December, the more market sensitive adjusted unemployment number increased by 17,000.
Clement is tipping that unemployment will decline by about 200,000 during the course of the year.
But in the meantime the jobless numbers could jump as a consequence of a statistical effect resulting from the launch this month of a key part of the government's tough labour market reforms as set out in the so-called Hartz reform package.
This Clement said could mean that average unemployment rising this year by 150,000 compared to 2004. However, without the so-called Hartz effect, he said average unemployment is likely to increase by 50,000.
Subject: German news