German confidence suffers second straight drop

21st April 2011, Comments 0 comments

Business confidence in Germany suffered a second monthly fall in a row, the closely watched Ifo indicator showed on Thursday, but the setback was roughly in line with analysts' expectations.

The Ifo index of business sentiment fell to 110.4 in April from 111.1 in March. Analysts surveyed by Dow Jones Newswires had on average forecast a drop to 110.5 points.

"Despite considerable risks at the international level, the situation of the firms in Germany remains excellent," said the institute's president, Hans-Werner Sinn.

The euro rose on the news as investors had feared a sharper drop.

Although companies were more pessimistic about their future prospects amid higher oil prices and crises in Japan and the eurozone, an index measuring their sentiment about their current situation also rose.

Carsten Brzeski, an economist from ING bank in Belgium, said the markets should shrug off the April decline.

"Do not forget: even after today's drop, the Ifo remains close to record highs and bodes well for a continuation of strong German growth," he said.

"For the time being, fortunately, the German economy will continue to be (almost) everybody's darling," he added.

Before March's small dip, the headline Ifo index had posted nine straight monthly gains as confidence flew sky high in Germany amid strong economic growth and relatively low unemployment.

After suffering the worst recession for more than six decades in 2009, Germany has stormed back to economic health, registering its strongest growth last year since the country reunified in 1990.

Berlin last week upgraded its forecasts for growth this year, with the economy poised to expand by 2.6 percent. In 2012 the government expects slower, but still healthy, growth of 1.8 percent.

As the German economy has roared ahead, unemployment has fallen, boosting domestic demand in a country that has historically relied heavily on exports for its success.

There have nevertheless been some clouds on the horizon, with Germany's other major sentiment index, the ZEW indicator of confidence among financial market players, also falling recently.

Earlier in April this index fell by more than analysts had expected as Japan, unrest in the Middle East and spiking oil prices took their toll on sentiment.

Rising inflation and interest rates also threaten to take a toll on the German economic recovery, observers say.

This month the European Central Bank raised interest rates for the first time since mid-2008 in a bid to contain inflation although ECB president Jean-Claude Trichet said it was not the start of a series of hikes.

"Quite a lot suggests the Ifo index will continue to fall in the coming months," said a more downbeat analyst, Ralph Solveen from Commerzbank.

The Ifo index is based on a survey of around 7,000 firms in Europe's top economy.

© 2011 AFP

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