German Business Confidence Rises to 12-Month High

By Frances Robinson

Sept. 24 (Bloomberg) -- German business confidence rose to a 12-month high in September, indicating Europe’s largest economy will gather strength after exiting its worst recession since World War II.

The Ifo institute in Munich said today its business climate index, based on a survey of 7,000 executives, rose to 91.3 from 90.5 in August. That’s the highest reading since September last year. Economists expected a gain to 92, the median of 40 forecasts in a Bloomberg News survey showed. The index reached a 26-year low of 82.2 in March.

The confidence report comes as Chancellor Angela Merkel enters the final leg of her re-election campaign. The government’s “cash-for-clunkers” program and improving global trade helped the economy expand 0.3 percent in the second quarter from the first. While the Bundesbank predicts a “strong pickup” in the third quarter, the recovery could falter when stimulus measures expire and as unemployment rises.

“Overall, the German economy is expected to recover in the next four quarters, but fiscal stimulus will be one the main drivers of this recovery,” said Stefan Bielmeier, chief German economist at Deutsche Bank AG in Frankfurt. “The risk is that the recovery is not sustainable when stimulus packages expire.”

Election Looms

Merkel, who leads opinion polls for the Sept. 27 election, has approved spending of about 85 billion euros ($126 billion) to rekindle growth. The measures include tax breaks, infrastructure investment and a 2,500-euro payment to people who scrap an old car and buy a new one. The car-scrappage fund ran dry earlier this month.

The euro was little changed after Ifo’s report at $1.4760.

Ifo’s gauge of the current situation rose to 87 from 86.2, while an index of executives’ expectations advanced to 95.7 from 95, the institute said.

“Expectations have run so far ahead of current conditions that it makes me pause for thought as to whether this is sustainable,” said David Milleker, chief economist at Union Investment in Frankfurt. “Germany is very dependent on exports to euro-area countries, and there are structural problems in Spain and elsewhere.”

The Spanish and Irish economies will contract 0.9 percent and 1.5 percent respectively in 2010, according to the Organization for Economic Cooperation and Development.

By contrast, Germany’s will grow 1.5 percent next year after contracting about 4.5 percent in 2009, the IW economic institute in Cologne forecast on Sept. 21.

German investor confidence rose to the highest level in more than three years in September, and the benchmark DAX share index has rebounded more than 50 percent from its March trough.

“We do see light at the end of the tunnel, there are more and more signs that the economy is improving,” HeidelbergCement AG Chief Executive Officer Bernd Scheifele said in an interview on Sept. 22. The cement maker, which this week raised 2.25 billion euros selling new shares, will benefit “noticeably” from the government’s stimulus programs, Scheifele added.

To contact the reporter on this story: Frances Robinson in Frankfurt at frobinson6@bloomberg.net