German business confidence posts surprise rise in June despite debt crisis

The Associated Press ~ staff The News
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BERLIN — German business confidence rose unexpectedly in June as the country’s economic recovery continued, though firms are growing more worried about what awaits in the next six months, a closely watched survey showed Tuesday.

The Ifo Institute’s business climate index rose to 101.8 points in June from 101.5 in May, when it had posted its first decline since February. Analysts had been expecting a dip for the second month in a row to 101.2.

Hans Werner Sinn, president of the Munich-based group, said the rise was driven by increases in confidence in the manufacturing and wholesaling sectors

“The economic recovery continues,” he said.

But the index’s overall rise was due to positive sentiment from businesses about their current situation, and their longer term outlook is more pessimistic, with expectations dropping to 102.4 from 103.7 in May — the second drop in a row.

“The message from the latest Ifo figures is unambiguous and twofold this morning,” said UniCredit analyst Andreas Rees. “First, momentum in June has been very strong as signalled by the current situation component. However, the signs of a slowdown in 2011 at the latest are mounting.”

Still, analyst Timo Klein with IHS Global Insight noted that six-month expectations remained at a high level, and said the overall “performance remains nonetheless remarkable in view of the unsettling influence of the Eurozone debt and euro crisis that had become especially virulent in early May.”

He said he was still predicting German GDP growth of 1.8 per cent for 2010 and 2011 as well.

“German economic growth has acquired considerable momentum during the second quarter, which will support during the second half of 2010 despite a foreseeable slowing down of the pace of the upward trend,” he said.

Germany has Europe’s biggest economy, and has settled into a modest recovery over the past year as healthier global demand helps its exports.

But earlier this month, Finance Minister Wolfgang Schaeuble announced a package of welfare cuts and new taxes aiming to save C80 billion by 2014, which some economists have worried might slow the German recovery.

Ahead of this weekend’s G-20 summit, President Barack Obama on Friday wrote a letter urging world leaders not to threaten the global recovery by trimming spending prematurely. The letter also criticized countries too heavily dependent on exports — a barely hidden reference to China and Germany.

Chancellor Angela Merkel on Monday rejected criticism that Germany was fueling global imbalances and pointed to the fact that the bulk of the country’s exports goes to its European partners within the single market. “If you take Europe as a single entity then the balance of trade is relatively balanced,” she said.

She also defended her plan to reduce the country’s deficit, saying that “if we don’t get to a sustainable path of growth but create inflated growth, we will have to pay for it with a next crisis.”

At the same time, however, two German newspapers reported Tuesday that Germany’s deficit looks like it will be less in 2010 than initially thought.

Both top-selling Bild and the Sueddeutsche Zeitung reported, citing unidentified government sources, that the deficit for the year would be about C60 billion — some C20 billion less than expected, thanks to higher tax revenues, lower unemployment costs and other developments.

Still, Otto Fricke, spokesman for the junior coalition Free Democrats on budget issues, said the planned cuts would go ahead.

“The C60 billion may be possible, but it would still be a record level of new debt,” Fricke told Bild. “And therefore it in no way changes the austerity course.”

The Ifo index is based on some 7,000 monthly survey responses of firms in manufacturing, construction, wholesaling and retailing.



Organizations: Ifo Institute, UniCredit, Bild Free Democrats

Geographic location: Germany, BERLIN, Europe China

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