German business sentiment at three-year high

25th August 2010, Comments 0 comments

German business sentiment has rebounded to levels seen before the 2007 financial crisis, the Ifo economic institute said Wednesday in the latest sign of strength from Europe's biggest economy.

An improvement in industrial leaders' assessments of the current situation and surprising retail sector confidence raised Ifo's headline index to 106.7 points in August from 106.2 points in July, the highest level since June 2007.

"The German economy remains robust," Ifo president Hans-Werner Sinn said as the closely-watched survey defied forecasts for a drop of its business climate indicator following a record jump of 4.4 points in July.

A forward looking expectations sub-index did edge lower however, reflecting widely-held views that the export-led economy will cool down later this year in line with weaker activity abroad.

The survey was released a day after official data confirmed the German economy grew 2.2 percent in the second quarter, the biggest gain since east and west Germany were reunified in October 1990.

The German central bank and economists now expect full-year growth of at least 3.0 percent, probably surpassing advances elsewhere in the 16-nation eurozone, and in Japan and the United States.

In October, the German government is expected to raise its official 2010 forecast of 1.4 percent growth.

In the United States meanwhile, government data showed Wednesday that new home sales had plunged to their lowest levels since 1963, while orders for big-ticket items rose in July but were still much weaker than expected.

Analysts also noted a difference between Ifo's positive poll and a gloomy ZEW survey of German investors last week followed by a mixed European Union purchasing managers' index released on Monday.

The PMI showed the eurozone economic recovery lost some momentum in August, with growth depending on Germany and France, the bloc's second largest economy.

Some observers worry about another recession in Europe but "thus far these double-dip fears are not shared by the company captains polled by the Ifo institute," Morgan Stanley economist Elga Bartsch noted.

IHS Global Insight senior economist Timo Klein forecast the German economic engine would chug on through the second half of 2010, with domestic demand accounting for a greater share of growth.

Germany's rebound from its worst post-war recession last year has been based on export demand from Asia and the United States which is likely to slow soon.

Business sentiment has now reached its highest level since before the global financial system was slammed by a collapse of the US market for high risk mortgages in mid-2007.

The strong rise in Ifo's current conditions measure along with a dip in companies' six-month outlook "is typical for a turning point at the peak of a business cycle in Germany," UBS economist Martin Lueck said.

Jennifer McKeown at Capital Economics noted that declining expectations marked the third such fall in four months, meaning that "signs of a slowdown in global demand are causing concern."

Ifo surveys some 7,000 German manufacturing, construction, wholesaleing and retailing companies each month for its snapshot of business sentiment.

Those in the manufacturing sector said the current climate was better than in July and the six-month outlook was still good but somewhat less so than in the previous month.

"The driving factor during July/August has been the retail sector," Klein said. "One has to go back to the post-unification euphoria in 1991 to find retailers being this upbeat about current conditions."

© 2010 AFP

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