German business climate improves in September

[September 24, 2010]  BERLIN (AP) -- German business confidence unexpectedly rose to its highest level in over three years in September as a stronger economy supported business, but the coming months are likely to be more difficult, a closely watched survey showed Friday.

The Ifo institute's confidence index, a key indicator for Europe's biggest economy, edged up to 106.8 points this month from 106.7 in August.

September's rise was the fourth in a row and takes the index to its highest level since June 2007.

The rise was also unexpected -- the consensus in the markets was for a modest decline.

"Firms are again more satisfied with their business situation," Ifo said. "For the near future they continue to be optimistic, although not quite as much as in August. The business high continues."

A subindex measuring companies' view of their current situation rose to 109.7 points from 108.2. However, the index that measures their outlook for the next six months slipped to 103.9 from 105.2.

The main impetus behind the September rise in confidence was the wider economy -- in the April-June quarter, the German economy grew by a massive quarterly rate of 2.2 percent. That was thanks in particular to booming exports.

The pace of growth is expected to moderate, though, amid signs that the global recovery from recession is faltering.

"Of course, second quarter growth was unique and exceptional and a slowdown is inevitable," said Carsten Brzeski, an economist at ING in Brussels.

"However, with richly filled order books, increasing investment and production plans and a strong labor market, prospects for the German economy look still promising," he said, adding that the Ifo reading "defies any double-dip concerns for the German economy."

One sign that strains in the global recovery are having an impact on Germany was a slight drop in Ifo's measure of the manufacturing climate. The decline was the first in over a year.

"The manufacturing index edged down for the first time in 18 months, suggesting that the effects of the global slowdown are beginning to be felt," said Jennifer McKeown, an economist at Capital Economics. "Exports will almost certainly slow further, particularly if the euro fails to reverse its recent appreciation."

The survey did show improvements in the construction and retail sectors, which should help cushion the blow from waning exports.

On Thursday, Germany's HDE retail trade association said it now expects retail sales to grow by 1.5 percent this year, rather than stagnating as it had previously predicted. Sales declined by 2 percent in 2009.

But while Ifo's latest retail reading looks encouraging, "with fiscal tightening set to begin soon, we doubt that a consumer revival will materialize," McKeown said.

Ifo's survey is based on monthly responses from some 7,000 companies.

[Associated Press; By GEIR MOULSON]

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