April 23, 2024

German Business Confidence, While Still High, Slides a Bit

The Ifo Business Climate Index, considered a reliable predictor of growth in the German economy, the largest in Europe, fell to 111.1 from 111.3, the first decline since May 2010. A reading above 100 indicates that the majority of the 7,000 businesses surveyed rate their current situation and expectations for the future as positive.

“On the whole, firms in Germany remain very confident,” Hans-Werner Sinn, president of the Ifo Institute for Economic Research at the University of Munich, said in the report. “The business-cycle traffic lights still signal ‘green.’ ”

The index was higher than expected and, along with data showing an increase in lending to European business, was not likely to dissuade the European Central Bank from raising the benchmark interest rate next month in a bid to pre-empt inflation.

However, analysts at Barclays Capital noted that the Ifo index showed a decline in expectations for the future even as businesses remained pleased with the current situation. That could be a sign that businesses were worried about the effect of turmoil in the Middle East and North Africa on energy prices, as well as what effect the aftermath of the earthquake in Japan could have on supplies of Japanese-made products like auto parts. About half of the responses to the survey came after the earthquake.

“The marked decline in the expectation balance provides a first warning signal that business sentiment might be more strongly affected in the coming months if these adverse developments were sustained for much longer,” Barclays analysts said in a note.

The emergency at the Fukushima nuclear power plants could also add to nervousness among German exporters.

“The Ifo business climate is clearly in boom territory,” Jörg Krämer, the Commerzbank chief economist, said in a note. But he added, “The risks for the forecast are higher than usual. Should the situation in Fukushima escalate, against expectation, and put Tokyo at risk, this would then also affect Western economies.”

If businesses turn pessimistic, they may be less willing to invest in expansion and to hire more workers. Their reluctance would then cause overall growth in Germany to slow, a problem for all of Europe. Germany has been towing the rest of the Continent through economic turbulence caused by debt problems in Greece, Portugal and Ireland.

In a separate report Friday, the European Central Bank said that lending to business, not including banks and other financial institutions, rose 0.6 percent in February from a year earlier. That is a modest increase and indicates that inflationary pressures in Europe are low, analysts said.

Still, most analysts expect the E.C.B. to raise its benchmark interest rate to 1.25 percent from a record low of 1 percent when the bank’s governing council meets April 7.

“We think the E.C.B. will take comfort from today’s Ifo release,” Jens Sondergaard, an analyst at Nomura, said in a note. “An E.C.B. rate hike in April is likely.”

Article source: http://www.nytimes.com/2011/03/26/business/global/26euecon.html?partner=rss&emc=rss

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