Economic Forecast
April 25, 2007
The widely watched business climate index, calculated each month by the Munich-based economic research institute Ifo, came as Economy Minister Michael Glos raised the German economic growth forecast for 2007 to 2.3 percent -- a sharp rise on the previous prediction of 1.7 percent.
"The upturn is continuing, growth remains strong and the situation in the labor market keeps getting better," Glos said.
Citing Germany's robust export performance, Glos said the present level of the euro was "sustainable," but warned that a strong currency can threaten a country's exports, making them more expensive and less competitive on world markets.
"If it (the euro) were to rise still more strongly, there would be risks," Glos said.
He was speaking as the euro moved closer to an all-time high point against the dollar, soaring to 1.3656 on Wednesday, well within striking distance of 1.3666, its record level reached on Dec 30, 2004.
Surpassing expectations
The influential Ifo index rose to 108.6 points in April from 107.7 points in March, putting it just one-tenth of a point away from the record score of 108.7 points recorded in December. Analysts polled by news agency Thomson Financial had predicted a far more modest surge, to 107.8 points.
"Germany is profiting from the extraordinary international investment boom, which due to Germany's specialization is having a stronger cyclical impact than in the other major European countries," Ifo President Hans-Werner Sinn said in a statement.
For its monthly survey, Ifo polls some 7,000 companies about their assessment of current business and their expectations for the next six months.
A breakdown of the data showed that the current sentiment sub-index rose to 113.2 points in April from 112.4 points in March. And the expectations sub-index also increased, rising to 104.3 points from 103.2 points, Ifo said.
Analysts said the data were further proof that the German economy has weathered a steep hike in value-added tax this year.
Jumping over hurdles
On Jan 1, the German government increased VAT by three full percentage points to 19 percent, the biggest-ever single rise in a move experts said would put the brakes on consumer spending and therefore drag on overall growth.
The robust health of the economy is now expected to reduce public debt and buoy the job market. The unemployment rate in March fell to 9.8 percent.
Ifo said in retailing and wholesaling, the business climate had also brightened noticeably in March with companies giving more positive appraisals of both their current situation and their six-month outlook. Sentiment in the construction industry, however, remained unchanged.
Positive outlook
Elga Bartsch of Morgan Stanley said the fact the euro had hit a two-year peak against the dollar had not hurt Germany's export-driven economy.
"Notwithstanding the stronger euro, the Ifo Institute also reported an improvement in the export expectations of German manufacturers," Bartsch said.
"Of course, a considerable share of those exports would go to other euro area countries. But, thus far, the mood amongst German manufacturers seems to be defiant regarding the euro," she said, adding that the strong single currency and a US slowdown could leave "skid marks" in the future.
Laying the groundwork
Bank of America's Holger Schmieding said German companies had helped lay the groundwork for the sharp economic upturn.
"With export expectations up according to an Ifo spokesman, it shows that the severe slashing of costs that German corporations had to do in the years since 2000 is paying off nicely," he said.
"German exports are competitive. So far, strong demand from Asia, central and eastern Europe as well as the oil countries seems to offset the rise in the euro and weaker US demand."
The sunny outlook in Germany would provide additional arguments for the European Central Bank to continue raising its key interest rates, analysts said.
"Along with rises in business confidence in Belgium and Netherlands, the surveys released so far this month support our view that the ECB will raise rates to 4.00 percent in June and once again in to 4.25 percent by year-end," said Sunil Kapadia of UBS Investment Research.