Hopes rise for recovery in the German economy

Prospects for German economic recovery looked brighter yesterday, with further encouraging data from the country's leading business index despite political setbacks that are threatening to undermine the government's tax and spending plans.

The Ifo index, which is regarded as a good indicator of trends in the euro zone, rose to 95.3 last month from a revised 93.7 in July. It was the index's fourth successive monthly rise and was significantly higher than the figures of 94.2 to 94.4 expected by financial markets.

Economists said the Ifo survey suggested that German businessmen were increasingly optimistic about their export prospects as the world economy recovers and Germany benefits from the euro's low external exchange rate.

However, they noted that the August survey was compiled too early to reflect anxiety about the political prospects for Germany's ruling Social Democrats. With the SPD crashing to four state election defeats in the past three weeks, serious doubts have been raised about the government's ability to pass an important programme of spending cuts and tax reforms.

The Ifo report follows other encouraging signs for the German economy, such as a 1.3 per cent month-on-month increase in July in industrial orders.

"The German economy will go into the new year with considerably greater momentum than was the case at the turn of the 1998-99 year," said Ulrich Hombrecher, economist at Westdeutsche Landesbank. He expects annual economic growth of 1.5 per cent this year and 2.5 per cent in 2000.

In a separate report, the European Union's statistical agency, Eurostat, said annual consumer price inflation in the 11-nation euro zone had risen to 1.2 per cent in August from 1.1 per cent in July. But economists said the rise was too slight to cause concern that the European Central Bank might raise its benchmark interest rate from 2.5 per cent when it convenes tomorrow for its regular fortnightly meeting in Frankfurt. Thanks largely to rising oil prices, inflation in the euro zone is now at its highest level this year. However, after stripping out the impact of energy prices, Eurostat said annual inflation had fallen to 0.7 per cent in August from 0.8 per cent in July.

Inflation in August was highest in the Netherlands, Ireland and Spain, where it stood at 2.5 per cent, 2.4 per cent and 2.3 per cent respectively. Austria and France had the lowest annual rate at 0.5 per cent. In the 15-nation EU as a whole, inflation rose to 1.2 per cent in August from 1.1 per cent in July.