IFO figures show German business optimism up

25 January 2006

HAMBURG – Optimism in Europe’s biggest economy bounded higher this month, with German business leaders shrugging off the high price of oil amid the conviction that years of slump are about to end, according to the authoritative IFO business climate index Wednesday.

The index, from the Munich-based think-tank IFO Institute, jumped to 102.0 this month, beating most analysts’ expectations. The closely watched monthly survey checks the pulse of 7,000 business executives and economists.

Only a month ago, the same index was just 99.7. Both sentiment about the current business situation and about the outlook several months away improved. The German economic recovery was gaining in strength, the president of IFO, Hans-Werner Sinn, said.

The current level of optimism had not been seen since May 2000, in the dying stages of the dot-com boom. By the following year, Germany’s economy was stumbling. While exports have boomed for more than a year now, domestic demand in Germany was weak all last year.

“Any doubts about the solidity of this recovery, which has been under way since last summer, will be further reduced by these figures,” said Sinn. Stock analysts were cheered and the DAX was running at 5388, up 1 per cent, soon after the figures came out.

This month’s jag in world oil prices has not shaken the overall German confidence, though IFO’s economists warn that it does pose a risk to recovery.

IFO expects the German economy to grow 1.7 per cent, based on an assumption that the oil price will average 60 dollars per barrel through the year, an IFO economist, Klaus Abberger, told Deutsche Presse-Agentur. If oil became dearer, growth would suffer.

The IFO index of sentiment about the current business position rose from 99.6 in December to 100.4.

The expectations index, which tracks executives’ views of where the economy will be in several months’ time, jumped a more significant 4 points from 99.6 to 103.6 and the optimism was found in all sectors except wholesaling.

In Berlin, Economics Minister Michael Glos said he expected German gross domestic product (GDP) to expand “roughly one and a half per cent” this year in real terms, saying this was based on an expert forecast for 2006 that ranged from 1.4 to 1.6 per cent.

Presenting Wednesday his first annual report on the state of Germany’s economy since he took office late last year, Glos said that the football World Cup tournament in Germany this summer and a race to spend before German sales tax increases in 2007 would help growth.

Berlin also expected private consumption in Germany to gain by 1.4 per cent in line with overall growth this year. He warned that next year would be a “difficult” year, with value-added retail tax set to rise from 16 to 19 per cent on January 1, 2007.

“Concern that there will be an abrupt downwards shift do not seem justified,” he said.

The government prefers to take a downbeat view at the moment, amid fears that it may not be believed if it tells Germans the good times are back. Glos told a news conference it was better to be surprised by a better result than to be caught out by a bad one.

According to IFO, business executives were unexpectedly optimistic in the construction industry, which has been among the sectors hit hardest by weak domestic demand.

Another IFO economist Gernot Nerb said on NTV television the figures also showed optimism within the investment-goods industry that German customers will be placing plenty of orders for new machinery.

In the past, that industry had been mainly sustained by export sales.

“The export outlook is as good as ever, and is now being enriched by domestic development,” said Abberger.

“Consumer spending can only get going when investment increases,” he said. While the figures suggested German enterprises were still mainly investing to replace obsolete equipment, their production capacity was also gradually increasing.

DPA

Subject: German news