German business confidence at three-year high, poll shows

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Business confidence in Germany has hit its highest level in three years, a key poll showed Friday, boosted by a rebound in Europe's biggest economy from a downturn that still weighs on its neighbours.

Analysts pointed to a strong gain in expectations for the next six months that suggest an anticipated slowdown in German activity might be shorter than expected.

The Ifo economic research institute said its business confidence index rose to 107.6 points in October from 106.8 points the previous month.

The widely-watched reading of sentiment had been tipped to slip to 106.4 points by analysts polled by Dow Jones Newswires.

Ifo's business expectations index rose to 105.1 points from 103.9 points in September meanwhile, defying an analyst forecast for a drop to 103 points.

"This is a very interesting pattern," UBS economist Martin Lueck commented, because it meant the start of the fourth quarter was stronger than forecast and companies were more optimistic than believed going into 2011.

"It could mean that the slowdown in economic activity signalled by most other lead indicators may well be more short-lived than feared so far," he said.

Ifo president Hans-Werner Sinn was quoted in a statement as saying German companies "have once again given more positive assessments of their current business situation and their business expectations have improved."

The survey was released a day after Germany raised its 2010 growth forecast to 3.4 percent and data showed activity across the 16-nation eurozone slumping to a 12-month low in October in both the manufacturing and services sectors.

"This means ongoing growth divergence in the EMU (European Monetary Union) and an increasing stretch for the ECB's one-size-fits-all monetary policy," Lueck said in reference to the European Central Bank.

A breakdown of the Ifo data showed gains in most sectors, though retailers were slightly less upbeat than before.

Morgan Stanley economist Elga Bartsch noted that her bank "had cautioned against putting too much hope on German spending habits when the last set of retail sales data surprised on the downside."

Ifo surveys around 7,000 German manufacturing, construction, wholesale and retail companies each month to establish the widely-followed index of business sentiment.

With the latest increase, Timo Klein at IHS Global Insight said: "The all-time high for pan-German data of 108.9 points (in December 2006) is now within reach.

"The background risks for a setback to the recovery, especially weakening global growth forces and a tightening of fiscal screws across Europe, cannot be ignored, but their importance for Germany's economic outlook must not be overstated," he added.

A pick-up in global trade has boosted the world's second-biggest exporter after China despite the euro's rise in value, while falling unemployment and rising business investment have also provided support for economic activity.

"The German economy did not suffer from any imbalances prior to the crisis, the government's crisis measures were well timed and targeted and the industry is benefitting from the global investment-led recovery," ING senior economist Carsten Brzeski said.

Commerzbank counterpart Joert Kraemer noted: "The Ifo business climate is not only influenced by economic expectations. Our calculations show that the earnings of German businesses also play an important role."

© 2010 AFP

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