FT.com / World / Europe - German business confidence surges

FT.com / World / Europe - German business confidence surges

German business confidence surges
By Ralph Atkins in Frankfurt

Published: March 27 2007 11:33 | Last updated: March 27 2007 11:55

German business confidence has bounced back close to a historic high this month, shrugging off fears of a US economic slowdown and the prospect of higher eurozone interest rates.

The unexpected rise in the Munich-based Ifo institute’s business climate index, from 107.0 in February to 107.7 in March, suggests Europe’s largest economy successfully withstood a three percentage point rise in value-added-tax and is on track for another impressive growth spurt this year.

“The upswing is strong and robust,” said Hans-Werner Sinn, Ifo’s president.

The upbeat survey strengthens the case for the European Central Bank to lift interest rates again – even though the US Federal Reserve maybe moving towards cutting borrowing costs. The ECB raised its main rate to a five-year high of 3.75 per cent earlier this month, and financial markets have pencilled in another quarter percentage point rise for June.

Preliminary German inflation figures yesterday suggested pricing pressures were mounting within the 13-country eurozone, perhaps as an unexpectedly-delayed result of the VAT hike. The ECB fears generous German wage settlements will add to underlying inflationary pressures.

After years of sluggish growth, the German economy returned in 2006 to its traditional role as Europe’s economic powerhouse, notching up its fastest-growth rate since the start of the decade.The Ifo index, based on a survey of 7,000 industrial companies, was one of the first indicators to pick-up the strength of the turnaround – even if analysts believed for much of last year that it was exaggerating its scale.

After peaking at 108.7 in December – the highest since the survey started in 1991 - the index fell in January and February this year, probably as a result of the VAT rise. But the latest survey showed both the assessment by businesses of the current situation and expectations about the next six months had improved in March. That suggested little, if any, European fall-out from problems in the US “sub-prime” mortgage market, or from the strengthening of the euro.

A large part of the explanation is that Germany’s upswing is becoming driven increasingly by domestic demand. The still-improving mood in German manufacturing was “all the more remarkable because expectations about overseas business have remained almost unchanged,” said Mr Sinn.

French business confidence also rose unexpectedly in March to the highest level for almost a year, according to a survey earlier this week, although a similar survey for Italy showed a slight dip in the mood.


Copyright The Financial Times Limited 2007