German business confidence remains robust (FT)

German business confidence has slipped this month, pointing to an economic slowdown in the months ahead – but no dramatic deceleration after recent robust growth.

The Munich-based Ifo institute’s business climate indicator fell from 105.6 in July to 105.0 this month. That was stronger than expected and German business remained as upbeat as last month about the current business situation. “The German economy is still in a good condition,” said Gebhard Flaig, an Ifo director.

The surprisingly robust Ifo figures came as separate data pointed to a broadening of the country’s economic recovery this year. Details of second-quarter gross domestic product figures showed a 0.9 per cent growth rate – the fastest quarterly rate for five years – was driven by domestic demand. Investment in construction leapt 4.6 per cent and in machinery and equipment by 2.5 per cent.

In contrast, exports – which had originally powered the upswing in Europe’s largest economy – made only a small contribution to growth.

However, private consumption – long the Achilles’ heel of the German economy – fell unexpectedly by 0.4 per cent in the second quarter. That highlighted the continuing nervousness of German consumers, who continue to save heavily. Robert Barrie, economist at Credit Suisse, said private consumption was “the third stage of the rocket” and that the second stage – investment – “is growing very strongly”.

The closely-watched Ifo is regarded as a good indicator of likely future trends in the German economy. Earlier this year, it reached the highest levels for 15 years – foreshadowing the strong second quarter GDP figures. The revival in eurozone growth is expected to result in further interest rate rises by the European Central Bank, with the next increase expected by economists in October.

Thursday’s only modest Ifo index fall followed the plunge in the economic sentiment index published by the Mannheim-based ZEW institute to the lowest level in five year, which had pointed to a marked slowdown. Analysts had been sceptical about the ZEW result, however, which they said largely reflected economists’ fears about the impact of higher VAT rates next year.

Nevertheless, German economic growth is still expected to cool after the surprising robust second quarter. The three percentage point rise in VAT planned by Berlin for the start of 2007 could persuade consumers to bring forward spending into this but result in gross domestic product contracting in the first months of next year, economists believe.

Details of the August Ifo survey showed that expectations about the six months’ ahead deteriorated further, falling to the lowest level since last December.

However the component of the index covering the assessment of current conditions was unchanged at 108.6 – down slightly from June’s figure but otherwise the highest figure since 1991.

Dirk Schumacher, economist at Goldman Sachs, said: “The second quarter probably was the peak in terms of the growth momentum. However, with the labour market looking better each month and the investment boom to continue we should see solid growth in the rest of this year.
Copyright The Financial Times Limited 2006