German business confidence up as Greece fears ease

German business confidence rose slightly in July, reflecting relief in Europe’s biggest economy about the easing of the Greece debt crisis, the Ifo economic institute said Monday.

Ifo’s closely watched business climate index rose to 108 points, the first increase in three months, from a revised 107.5 points in June, beating analysts’ expectations, the institute said.

“Forget about Greece? This is at least how German businesses seem to look at Greek turbulences of the last weeks, judging from the latest Ifo numbers,” wrote Carsten Brzeski, chief economist at ING-DiBa.

“In the eyes of German businesses, the external tailwinds, stemming from low energy prices and a weak euro, clearly outweigh any downside risk from the Greek crisis on the German economy.”

After months of crisis talks and fears Greece would crash out of the euro common currency, eurozone ministers and Athens have agreed to resume talks for a third EU-IMF bailout.

“The recent easing of the Greece situation contributed to stronger sentiment in the German economy,” Ifo president Hans-Werner Sinn said in a statement.

“Assessments of the current business situation improved significantly after last month’s setback. Business expectations were also somewhat more optimistic after declining for three consecutive months.”

The index is based on survey responses from some 7,000 companies in manufacturing, construction, wholesaling and retailing. They are asked to give their assessments of the current business environment and their outlook for the next six months.

The sub-index measuring current business in July rose to 113.9 points, while the outlook sub-index was up to 102.4 points.

– ‘On steroids’ –

Brzeski said the data was good news for Germany’s export-driven economy, writing that “even if the doses has been reduced somewhat, the German economy is still on steroids”.

Looking ahead, however, he pointed to risks, including “the never-ending Greek crisis, which despite latest positive developments is still far from being solved and could re-escalate quickly at almost any time”.

He also said this year Germany’s trade-reliant economy could be impacted by “longer-than-expected periods of weakness of the US and the Chinese economy”.

Berenberg Bank’s Holger Schmieding wrote that “German businesses, who tend to react sensitively to any global disturbance, are shrugging off the Greek noise” with the surprise rise in business confidence.

“While business confidence is not quite back to its recent cyclical peak of 108.5 in April, it is comfortably above the long-run average of 101.4,” he wrote.

“Taken at face value, it points to above-trend growth for Germany based on buoyant domestic demand as well as some pick-up in exports.”

The German bank Bayerische Landesbank said that, aside from relief over Greece, German business may also have reacted to the landmark agreement reached between major powers and Iran to curb the Islamic republic’s nuclear programme in return for sanctions relief.

“The agreement in the Iran nuclear dispute, which has significantly improved the export prospects of German industry in the region, fell within the survey period,” it said in a research note.

Jennifer McKeown, senior European economist at Capital Economics, said she saw “positive signs” from fresh German and European data but cautioned that “the recovery remains very fragile”.

“July’s rise in German Ifo business sentiment is an encouraging sign that the recovery has continued despite the Greek crisis, although it does not seem to be gaining much pace,” wrote McKeown.

She said the business confidence data “now appears consistent with annual German GDP growth of close to 2 percent, or quarterly gains of around 0.4 percent, which would be slightly stronger than our forecast”.

“But this would still not be enough to drive a meaningful recovery across the region, and a renewed decline in German sentiment seems quite possible given the growing risk that negotiations in Greece may falter.”