German business confidence up more than expected

AP News
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Posted: Jan 25, 2012 6:35 AM
German business confidence up more than expected

German business confidence rose for the third month in a row in January, according to the much-watched Ifo index released Wednesday, suggesting a widely-predicted European recession may not be as bad as feared.

The index's increase to 108.3 points from 107.2 in December exceeded market expectations for a reading of 107.5. Business managers' assessment of how things are now slipped, but the part of the survey that measures future expectations rose.

That is a sign that Germany, Europe's largest economy, may show moderate growth this year despite the debt crisis that is pushing some countries back into recession.

The German statistics agency said the economy may have shrunk by about a quarter percentage point in the last three months of 2011, but final figures are not yet out. The government has cut its estimate for 2012 growth from 1.0 percent to 0.7 percent as the debt crisis weighs on Germany and its trade partners in the 17-nation eurozone.

Europe is struggling with a crisis over too much government debt in some countries. Greece, Ireland and Portugal are in deep recessions after being bailed out by other eurozone governments to avoid defaulting on their debts, while the economies of Italy and Spain are troubled as well.

Financial markets turmoil has eased in the first weeks of 2012 after a gloomy end to 2011, with government borrowing costs falling on bond markets and stocks rising. Much of the credit is given to large loans handed out to the banking system by the European Central Bank.

The ECB's head, Mario Draghi, has said the action prevented a credit cutoff and indicated he saw signs of "stabilization" in economic activity, although still at a low level. The central bank cut interest rates in November and December by a quarter point to try to stimulate the economy.

Andreas Rees at UniCredit said three monthly Ifo rises in a row was historically a dependable indicator that the German business cycle is about to turn upward in coming months. "Signs are mounting that we hit a bottom" in the first quarter of this year "with a pick-up in spring or summer becoming more and more likely."

The upbeat Ifo numbers follow purchasing managers' surveys released Thursday that showed German activity in services and manufacturing rose unexpectedly.

Despite Germany's resilience, many economists think the eurozone will go through at least a mild recession this year. The International Monetary Fund predicts the economy will shrink by 0.5 percent, and the situation remains fraught with uncertainty. Greece is trying to get bondholders to agree to a reduction of 50 percent in the face value of the country's bonds as part of a second financial rescue package; failure could mean Greece might not be able to pay debts coming due in March and trigger financial turmoil of unknown extent and consequences.

Jennifer McKeown, senior European economist at Capital Economics, said the Ifo numbers "suggest that the economy is holding up relatively well, but activity is nowhere near strong enough to provide a meaningful boost to the eurozone's periphery."

She said the future expectations, a better indicator of future activity than the overall survey number, suggests annual growth of 1.5 percent. The future indications part of the index rose to 100.9 from 98.6 the month before.