German Ifo index races ahead

German business confidence improved more than expected in February, suggesting that the eurozone's largest economy is heading towards recovery.

The fourth consecutive monthly rise in the closely-watched Ifo business index pushed the euro up to a high of 0.8720 cents against the dollar.

"The worst is behind us \ it's too early to say how strong the recovery will be," said Mr Gernot Nerb, chief economist at the Ifo economic institute in Munich. With an eye on tomorrow's ECB council meeting in Frankfurt, he said "there is room to manoeuvre for a rate cut".

The ECB last cut its key interest rate to 3.25 per cent in November, but is not expected to make any move this week. The Ifo index, seen as an indicator of growth prospects in the rest of the euro zone, is based on the business situation and expectations of 7,000 firms in western Germany.

The overall index rose to 88.7 in February from 86.2 in January, while the business expectations index was 101.0, up from 94.8 in January.

But the index is still well below its long-term average of over 92 per cent, levels not seen since the first half of last year. Since then, the index dropped sharply, after worries about the German economy were compounded by the September terrorist attacks in the US.

Mr Klaus Friedrich, chief economist of Dresdner Bank, said yesterday's figures were a cause for optimism. "The valley of tears is behind us and the economy will now begin to grow again," he said.

Other economists were more cautious, believing that a turnaround in Germany would be felt first in the summer, too late to have a positive effect on unemployment and economic growth before September's general election.

The good news was overshadowed somewhat by remarks in the European Parliament by Mr Pedro Solbes, European Commissioner for Economic and Monetary Affairs.

He expressed disappointment that euro-zone finance ministers decided against endorsing his proposed early warning to Germany and Portugal earlier this month.

Mr Solbes said he remained concerned about the divergence between Commission economic forecasts and member-states' own forecasts.