German business confidence at highest level in 16 months

German business confidence rose to the highest level in 16 months in August, beating forecasts and indicating the recovery in Europe’s largest economy is gathering pace.

The Ifo business climate index, based on a survey of 7,000 executives, climbed to 107.5 from 106.2 in July, the Munich-based institute said yesterday. That's the highest since April 2012.

Economists had predicted an increase to 107.

German gross domestic product expanded 0.7 per cent in the second quarter, rebounding from a colder-than-usual winter that curbed output and helping the 17-nation euro zone emerge from its longest-ever recession.

Germany’s growth was led by private consumption and included the first increase in plant and machinery investment since 2011.

"The latest business sentiment readings confirm our view that the German economy will be able to maintain a somewhat more moderate but still robust momentum in the second half of 2013, following the exceptional rebound in the spring," said Alexander Koch, an economist at UniCredit Group in Munich. "Domestic demand should remain a major growth pillar, currently adding to an overall broad-based recovery path."

An assessment of construction activity slid to -4.2 from -1.5 the previous month and a measure of retailing dropped to 2.6 from 3, signalling a potential slowdown.

"The fall in the construction index seems to confirm that the second quarter's sharp rise in activity was a temporary bounceback from bad weather in the first quarter," said Jennifer McKeown, an economist at Capital Economics in London.

“The fall in the retail index is a reminder not to put too much faith in German consumers. Nonetheless, it seems that a moderate recovery is finally underway.”

The Bundesbank predicts German GDP will expand 0.3 per cent this year and 1.5 per cent in 2014. – (Bloomberg)