UPDATE 2-German business morale hits 18-month high in December

Wed Dec 18, 2013 7:13am EST

* Most-watched German sentiment indicator follows others higher

* Bundesbank optimistic on final quarter of year, start of 2014

* Much of hard data less optimistic

* Still questionmarks over generally weak European upturn

By Michelle Martin

BERLIN, Dec 18 (Reuters) - German business morale improved in December, hitting its highest level since April 2012, another sign that growth in Europe's largest economy may accelerate next year after a relatively subdued 2013.

Following strong ZEW and purchasing manager surveys this month, the Munich-based Ifo think tank said on Wednesday its business climate index, based on a monthly survey of 7,000 firms, rose to 109.5.

That was in line with the consensus forecast in a Reuters poll but up from 109.3 in November and also followed a bullish outlook from the Bundesbank, which said earlier this week that the economy would grow strongly this quarter and next.

"Nothing can ruin German business optimism," said Carsten Brzeski, senior economist at ING.

"Unless German businesses have slowly lost touch with reality, the economy should pick up steam again and cruise smoothly into the next year."

The ZEW survey this week showed investor sentiment hitting its highest level since April 2006 and the purchasing managers' index showed the private sector growing for an eighth straight month. Consumer morale is also at a six-year high.

But there are question marks.

The "hard" backward-looking data collected by the German state has been generally less optimistic than privately-produced and forward-looking sentiment surveys. Industrial production, orders and retail sales have all fallen in monthly terms.

The rest of the euro zone is still struggling to get on its feet. France is all but stagnant and Italy, Spain and the bloc's southern economies all face years of economic struggle when they will be ill-equipped to buy high-end German goods.

That again leaves the onus on demand from traditionally conservative German consumers, who have tended to prefer saving to spending, to drive the pickup. Domestic demand was the main driver of growth in the third quarter.

"The rise in the survey still seems to be built largely on hope, rather than reality," said Jonathan Loynes, chief European economist at Capital Economics.

"This picture is supported by the general softness of the hard data e.g. on industrial production, which have pointed to a weak start to Q4."


Having steamed ahead during the early years of the euro zone crisis, the German economy slowed in 2012 and had a subdued start to 2013 before bouncing back in the second quarter.

Ifo expects it to grow by a modest 0.4 percent this year before picking up to 1.9 percent next year thanks to an improving global environment and favourable conditions at home.

"The economy is in a good position but will only pick up momentum in 2014," Ifo economist Klaus Wohlrabe told Reuters, adding industry and construction would be the main drivers.

"German firms expect good export figures," he said, adding Christmas business would be good due to demand for clothes, fabrics and domestic electronic goods.

Germany's HDE retail association said earlier this month it expected a 1.2 percent rise in Christmas sales this year and the VDMA engineering association said this week output would grow by 3 percent in 2014 after a predicted decline this year.

The improvement in business sentiment was largely driven by an upturn in the mood among construction companies and manufacturers, both of which had a weak start to 2013.

Daimler said this week its Mercedes-Benz division will push output to a new record this year as German plants are running extra shifts to meet strong demand for new compact models as well as the overhauled S-Class flagship sedan.

But sub-indexes showed that while firms had the highest expectations for their future business since March 2011, they were more downbeat about the current situation.

Brzeski said while growth would gain momentum in the final quarter of 2013, confidence indicators pointed to a much higher growth rate than monthly data justified.

Comments (0)
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.