German Business Confidence Rises to 18-Month High

By Gabi Thesing

Jan. 26 (Bloomberg) -- German business confidence rose more than economists forecast to an 18-month high in January as the global economic recovery boosted exports.

The Ifo institute in Munich said its business climate index, based on a survey of 7,000 executives, increased to 95.8 from 94.6 in December. That’s the highest since July 2008 and the tenth straight increase. Economists expected a gain to 95.1, according to the median of 41 forecasts in a Bloomberg News survey. The index reached a 26-year low of 82.2 in March last year.

Rising foreign sales, fueled by Asian demand, may help offset a slide in domestic spending and ensure Germany’s economy continues to expand. The government said last week it will raise its 2010 growth forecast to 1.5 percent from 1.2 percent even as some of its stimulus measures expire. Europe’s largest economy shrank 5 percent last year, the most since World War II.

Today’s report “laid to rest some of the concerns that the economy is running out of steam,” Carsten Brzeski, an economist ING Group in Brussels, said in a telephone interview. “The recovery is still very strong. It’s industry-led, which should hopefully also support the labor market.”

Ifo’s gauge of executives’ expectations jumped to 100.6, the highest since July 2007, from 98.9. A measure of current conditions gained to 91.2 from 90.4.

The euro rose after the report to $1.4103 from $1.4084.

Mixed Picture

Recent data have painted a mixed picture of the state of the German recovery. While investor and consumer confidence declined this month, the country’s manufacturing industries expanded more than economists expected and the Economy Ministry unexpectedly revised up its estimate of November factory orders last week.

That prompted Bundesbank President Axel Weber to say on Jan. 22 that he’s “a bit more optimistic” about the outlook for German growth. At the same time, cold weather and weak consumption “speak against too much euphoria,” he said.

Ifo economist Gernot Nerb said the increase in business confidence was partly due to exports boosting manufacturing. Sentiment in the construction sector also improved, he told Bloomberg Television in an interview.

Government Subsidy

Germany’s Volkswagen AG, Europe’s largest carmaker, said on Jan. 11 it wants to increase its worldwide market share further in 2010 after reporting record sales for 2009. Sales in China surged 37 percent. Still, the company’s Skoda Auto division forecasts sales in Germany, the brand’s largest market, will fall 37 percent this year after a government subsidy on new car purchases expired.

The prospect of rising unemployment will weigh on household spending in Germany, Klaus Baader, co-chief European economist at Societe Generale SA in London, wrote in a note to investors. There is “virtually no scope for gains in private consumption in 2010,” he said.

Metro AG, Germany’s largest retailer, said on Jan. 12 it expects economic conditions to “remain challenging” this year.

The outlook for the global economy and the euro’s 7 percent drop against the dollar since November bode well for exporters. The U.K., Germany’s fourth-largest export destination, exited recession in the fourth quarter, a report showed today.

Confidence in the world economy rose in January, the Bloomberg Professional Global Confidence Index showed Jan. 14, with Asia’s index outpacing those of other economic blocs.

The International Monetary Fund will probably raise its estimate for 2010 world growth this month from a 3.1 percent forecast in October, John Lipsky, the organization’s first deputy managing director, said Jan. 6.

To contact the reporter on this story: Gabi Thesing in London at gthesing@bloomberg.net