German business sentiment ends year on a high note

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German business confidence ended the year at an all-time high, the Ifo institute said Friday as Europe's top economy headed for record growth thanks to a welcome recovery in domestic demand.

The new record stemmed from soaring retail sentiment that could see German consumers also help European neighbours struggling with a dogged debt crisis.

Germany has weathered the eurozone crisis well and looks set for more strong growth in 2011 as low interest rates encourage business investment, economists said.

Ifo's closely watched reading of German business sentiment climbed to 109.9 points in December from 109.3 points in November, its seventh rise in a row.

A sub-index of expectations for the coming six months also set a new record of 106.9 points, up from 106.3 in November.

The strongest rise was seen in the retail sentiment indicator, which jumped from 13.4 to 24, "reflecting bouyant expectations among retailers for a very strong holiday sales period," Barclays Capital analyst Frank Engels said.

Consumption has long been the weak link of German economic activity but falling unemployment and higher wage prospects have given household sentiment a lift in recent months.

"It would be an understatement to say that retailing is optimistic," UniCredit economist Andreas Rees commented.

Sentiment in the manufacturing and construction sectors edged lower meanwhile, but Ifo said that in manufacturing, "stronger stimulus is expected from exports and firms are planning to hire additional staff."

Its survey came after a German purchasing managers index posted a gain for December and following an advance in the financial market confidence indicator published by the ZEW institute.

The economy should thus start 2011 "at full throttle as it is taking the next stage towards a self-sustained recovery," ING senior economist Carsten Brzeski said.

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

"Following an increase in exports, investment in particular has been responsible for the upswing and the outlook is now even good for consumption," Ifo president Hans-Werner Sinn said.

The latest survey underpinned forecasts that Germany will post record growth this year despite financial uncertainty fueled by the debt crisis.

The German central bank has estimated 2010 growth at 3.6 percent, the strongest pace since the country's reunification in late 1990.

"Unusually low interest rates and the moderate level of the euro are certainly supportive factors," said IHS Global Insight senior economist Timo Klein.

Rees added that "consumer spending and -- very likely -- investment activity are taking over" from exports as drivers of economic growth.

The Financial Times Deutschland reported Friday that gas-rich Qatar, which owns substantial stakes in the car giant Volkswagen and construction group Hochtief, is eyeing other German investments.

Stronger household demand meanwhile might help Berlin respond to European critics who say Germany is benefitting from global growth via exports while its neighbours struggle.

Rees said stronger German consumption should aid eurozone partners and concluded that the latest Ifo survey was "good news for Germany and -- yes -- the rest of Europe" as well.

© 2010 AFP

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