'Ray of hope' as business confidence in Germany up

GERMANY’S INFLUENTIAL Ifo economic institute has spotted a “silver lining on the horizon” after its closely watched index posted an unexpected rise in German business confidence.

The influential index, based on interviews with 7,000 managers, increased to 83.0 in January from a revised reading of 82.7 last month.

The important index of future expectations in the coming months jumped to 79.4 from 76.9.

“It’s too early to speak of a change in the trend – more like slowly reaching the bottom of the valley,” said Ifo chief economist Gernot Nerb. “We’re still moving at the level of the early ’80s after the second oil crisis.”

Analysts suggested the unexpected rise was a sign that managers were reassured by economic stimulus programmes coming on stream across Europe; yesterday the German cabinet in Berlin signed off on a second €50 billion programme.

Leading analysts called the Ifo index a “ray of hope”, but with Europe’s largest economy expected to shrink by over 2 per cent this year they warned that the worst was far from over.

“The outlook remains for the economy to shrink significantly in the first and second quarters, bottom out in the third and start to recover in the fourth,” said Holger Schmieding, chief European economist at Bank of America in London.

Particularly positive was the rise of sentiment among retailers, up to -26.6 from -30.4. One analyst at Unicredit in Munich suggested the “vicious circle” of German consumer caution had been broken.

Retailers will be keeping a close watch for proof of that during winter sales which began in Germany earlier this week.

With the European Central Bank likely to cut rates again in March, governing council member Axel Weber, president of the Bundesbank, said he was optimistic that a first-quarter contraction would be followed by a “period of stabilisation and, in the next year, a slight revival”.

A separate report showed that import prices in Germany dropped another 4 per cent in December after falling 3.4 per cent the previous month – chastening news in the export-driven German economy.

Exports have plunged 10.6 per cent since October, and in November companies recorded their worst-ever decline in manufacturing orders.

However, Mr Nerb suggested yesterday that the worst-case export scenarios were unlikely to materialise. “Exports in Germany will this year perform a little weaker, but not as badly as we feared, particularly once the economic programmes kick in.”