German Business Sentiment Probably Rose a Fifth Month in August

By Christian Vits

Aug. 26 (Bloomberg) -- German business confidence probably rose for a fifth month in August, suggesting Europe’s largest economy will gather strength after shaking off its worst recession since World War II.

The Ifo institute in Munich will say its business climate index, based on a survey of 7,000 executives, increased to 89 from 87.3 in July, according to the median of 41 forecasts in a Bloomberg News survey. That would be the highest reading since October last year. The index reached a 26-year low of 82.2 in March. Ifo releases the report at 10 a.m. today.

Germany’s economy unexpectedly expanded 0.3 percent in the second quarter as improving global trade boosted demand for exports and government measures to stimulate domestic spending kicked in. Bundesbank President Axel Weber said last week that, while he’s “not yet convinced” the recovery can be sustained, third-quarter growth may be “better than thought.”

“The economy will rebound strongly in the second half of the year, driven by exports,” said Ralph Solveen, head of economic research at Commerzbank AG in Frankfurt. “However, one has to bear in mind that even with healthy growth in the third and fourth quarters, we won’t get back to the level of output seen at the beginning of 2008.”

German Chancellor Angela Merkel’s government, which faces a national election in September, is spending about 85 billion euros ($122 billion) to rekindle growth, including tax breaks and a 2,500-euro payment for consumers who scrap their old car and buy a new one. The Economy Ministry has indicated its forecast of a 6 percent economic contraction this year may now be too pessimistic.

Expectations

Executives’ assessment of the current situation as well as their expectations will improve, according to the survey of economists. Investor confidence jumped to the highest level in more than three years this month and the benchmark DAX share index reached an 11-month high yesterday.

Volkswagen AG this month raised its full-year sales forecast after the “cash-for-clunkers” program helped spur demand for its Golf and Polo compacts. Deliveries may fall 5 percent this year, half the decline previously estimated, Europe’s largest carmaker said.

BASF SE, the world’s biggest chemical company, said Aug. 20 that demand is stabilizing and it has fewer employees at its main German plant on shortened working hours.

The Bundesbank nevertheless expects unemployment to rise to 10.5 percent next year from 8.3 percent today as companies cut costs to restore profit.

Sustainable Recovery?

“There’s still a risk that the economy will contract again next year as the labor market will deteriorate significantly, burdening private consumption,” said Alexander Koch, an economist at UniCredit Group in Munich. “However, we also see the chance that growth will strengthen more than expected.”

European Central Bank policy makers have stressed the heightened degree of uncertainty over the economic outlook and indicated they won’t rush to withdraw emergency measures to prop up the economy. The ECB has cut its benchmark interest rate to a record low of 1 percent, flooded banks with cash and started buying 60 billion euros of covered bonds in an effort to revive lending.

“We see some signs confirming that the real economy is starting to get out of the period of freefall,” ECB President Jean-Claude Trichet said at the U.S. Federal Reserve’s annual symposium in Jackson Hole, Wyoming, on Aug. 22. This “does not mean at all that we do not have a very bumpy road ahead of us.”

To contact the reporter on this story: Christian Vits in Frankfurt at cvits@bloomberg.net