Hopes rise for German economic rebound

The Ifo business climate index for Germany rose to 102.4 in December from 101.4 the previous month, beating expectations.

Story highlights

  • German Ifo business climate index rises to highest level since June, beating economists' expectations
  • Data still remains consistent with forecasts of a German economic contraction in the fourth quarter
  • Germany has escaped relatively unscathed from crisis in part by shifting exports from eurozone to other countries

Hopes for a shortlived downturn in the German economy received a lift on Wednesday after a closely watched business climate index rose for the second consecutive month, beating economists' expectations.

The Ifo business climate index for Germany rose to 102.4 in December from 101.4 the previous month to reach its highest level since June. The median forecast among analysts in polls conducted by both Reuters and Bloomberg was for the index to rise to 102.0.

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However beyond the positive headline, assessments among the 7,000 businesses surveyed by the Munich-based Ifo Institute were gloomier about the current situation, the index for which fell in December.

The data were consistent with forecasts for a contraction of the Germany economy in the fourth quarter followed by a gradual recovery next year. The fate of Europe's biggest economy is crucial for the rest of the eurozone, although part of Germany's success has been in substituting weak exports to other eurozone countries with exports to countries outside the bloc.

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The European Central Bank this month significantly cut its economic forecasts for the eurozone for next year, but public statements by Mario Draghi, its president, and other policy makers have highlighted reasons for optimism. They argue that structural reforms in distressed eurozone countries will start to have a beneficial effect after the contraction caused by austerity and point to receding financial market jitters about the fate of the single currency.

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At its interest rate-setting meeting this month, the ECB's governing council kept the main refinancing rate on hold at 0.75 per cent but there were calls for a cut, which raises the prospect of a negative interest rate on the corresponding deposit rate, now at 0 per cent.

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"If this trend continues, the ECB could call off the [refinancing] rate cut that many council members are presently considering," wrote Jörg Krämer, chief economist at Commerzbank.

The Ifo's business expectations component in manufacturing and construction both made strong gains while service sector sentiment remained subdued.

"A further rise in sentiment levels early next year still has to confirm our expectations of a real turnround in manufacturing and the overall economy in the first quarter," Alexander Koch, economist at UniCredit, said in a note. "But the odds for this scenario have clearly improved, and above all a timely compromise on the fiscal cliff in the US would reduce uncertainty further."

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