UPDATE 2-German business mood brightens, but risks abound

Mon Jun 24, 2013 7:23am EDT

* Ifo sentiment index up for second month

* Auto industry drove expectations for export improvement-Ifo economist

* Firms more downbeat about current conditions

* Risks from Japan, China, Europe, U.S. Fed, say economists

By Michelle Martin

BERLIN, June 24 (Reuters) - German business morale edged up in June as exporters anticipated an upturn in fortunes, raising hopes that Europe's largest economy is putting recent weakness behind it - though a fragile global backdrop suggested the mood could darken.

The Munich-based Ifo think-tank said on Monday its business climate index, based on a monthly survey of some 7,000 firms, climbed for a second month running to 105.9 from 105.7 in May, in line with the consensus forecast in a Reuters poll.

Exporters, traditionally the drivers of German economic growth, were significantly more upbeat than in May, Ifo said, while heavy flooding in the south and east of the country failed to dent the mood among domestically-focussed firms.

"German industry is pinning strong hopes on exports," Ifo economist Klaus Wohlrabe told Reuters, adding that he expected the economy to grow significantly more in the second quarter than in the first three months of 2013.

The German economy propped up growth in the euro zone during the early years of the debt crisis, but slowed last year as exports and investment weakened and only just avoided recession in early 2013 thanks to household spending.

Earlier in the year Cyprus's messy bailout situation and an Italian election which left no political force with enough seats to form a majority had depressed business sentiment in Germany.

"With tensions in the euro zone fading again after the early spring wobbles around Italy and Cyprus, Germany's economy looks set to continue its healthy rebound," said Christian Schulz, senior economist at Berenberg Bank.

RANGE OF RISKS

But others offered fewer grounds for optimism, emphasising a range of risks including tougher competition from Japan, a sickly euro zone economy, a growth slowdown in China and less central bank monetary stimulus.

"The main risks for the German economy remain stagnating growth in its main euro zone trading partners, above all France, and a hard landing of the Chinese economy," Carsten Brzeski, senior economist at ING said.

Business confidence in Germany could also take a knock after Europe failed at the weekend to agree on how to share the cost of bank rescues and Greece's ruling coalition lost its smallest party, potentially making it harder to pass the reforms the country needs to implement to qualify for more bailout payments.

In another positive sign, Ifo's Wohlrabe said Germany's big auto industry was the main force behind the improvement in export expectations, even though European car sales plunged last month to their lowest May level in two decades.

With many European economies in or near recession, German exporters have relied on China as a strong alternative market, but growth rates are weakening there too.

German manufacturing, which accounts for around a fifth of the economy, fared well in the survey. Factories felt a little happier with their current business situation - welcome news after a survey last week showed industry contracting in June.

Companies were more pessimistic about current business, the Ifo survey showed. That tallies with recent downbeat announcements from big firms like Commerzbank, which plans to cut about 12 percent of its full-time staff.

But firms were more upbeat about their business outlook, with that sub-index rising to 102.5 from 101.6 in May.

"That points to a better third quarter than expected so far. It's a positive signal that the upswing could gather speed," said Christoph Weil, economist at Commerzbank.

Recent data has painted a mixed picture, however, with foreign trade, output and investor sentiment improving but industrial orders dwindling and unemployment edging up.

The government expects growth to pick up in the second quarter but sees foreign trade dragging on growth this year, while Germany's central bank said there were signs the growth rate would slow over the summer.

While Chancellor Angela Merkel and her opposition challenger Peer Steinbrueck have not made the economy a major campaign issue ahead of a national vote in September, any significant weakening would make it harder for Merkel to win a third term.

The German economy nonetheless remains robust compared to many of its recession-mired peers like Spain.

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