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German economicupswing takes hold

Published on 18/12/2003

18 December 2003

MUNICH – German business confidence rose for the eighth consecutive month in December, a survey of 7,000 executives released Thursday showed, bolstering evidence that the recovery in Europe’s biggest economy is taking hold.

The Munich-based Ifo economic institute said its headline index for western German business sentiment rose to 96.8 points in December from 95.7 points in November.

The closely watched index now stands at its highest level since January 2001. In October it stood at 94.3 points.

Analysts had predicted that the index, which is one of Europe’s leading economic indicators, would rise to 96.5 in December with the country’s business leaders apparently shaking off worries about the impact on foreign orders of a surging euro.

“The renewed improvement in the business climate index in west Germany confirms the expectations of the Ifo institute that the economic recovery has set in and is gaining strength,” said Ifo President Hans-Werner Sinn.

“The surveyed sectors that have lagged behind are also beginning to recover,” he said with all branches of industry recording an improved reading, except the country’s hard-pressed retail sector where Christmas sales have so far proven to be somewhat disappointing.

The increase was led by another sharp rise in the expectations component of the survey, which jumped from 108.7 in November to 111 in December.

The rise in the Ifo business confidence index helps to confirm the general picture that Germany’s pickup is in motion, said Ralph Solveen, economist with Commerzbank AG.

Three years of economic stagnation in Germany, which represents about one third of the economic activity in the 12-member eurozone, came to an end in the third quarter when the first signs of a turnaround began to emerge in the nation’s hard economic data.

But as a sign that the recovery in Germany is still at a fragile stage, industry’s assessment of current business conditions edged forward only marginally to 83.3 in December from 83.2 in November.

Moreover, business confidence in Germany’s former communist east dropped to 104.6 December from 105.2 in the previous month as future expectations fell back and the regions industry’s leaders assessment of current conditions remained unchanged.

Going forward, forecasts of further rises in the euro combined with Chancellor Gerhard Schroeder being forced to scale back his planned tax cuts so as to push his economic reform package through the opposition-controlled upper house of parliament has raised concerns among analysts about Germany’s economic growth outlook.

The euro hit a new all-time high of 1.2419 dollars following the release of the latest ifo report.

Instead of tax cuts totalling EUR15.6 billion, the tax reform plan to be pushed through parliament tomorrow will include total tax reductions of EUR 8.9 billion leading economists to conclude that the tax reductions will provide at best only a very small fiscal stimulus when they are introduced in January.

As a result, some economists believe that the Ifo index may start to level out or even dip in the coming months.

With consumer demand in Germany remaining sluggish, exports have emerged as the key pillar of the regions growth fuelling fears that the strong euro might hit exports and consequently dampen what is already likely to be a very modest upswing.

Subject: German news