UPDATE 2-German business morale reaches highest level in 2 1/2 years

Mon Feb 24, 2014 6:10am EST

Related Topics

* Ifo index rises for fourth straight month

* Economists say survey points to economy picking up

* Companies slightly less upbeat on future

By Michelle Martin

BERLIN, Feb 24 (Reuters) - German business morale rose in February to its highest level since July 2011, suggesting Europe's largest economy will grow faster in the first quarter after expanding only modestly last year.

The Munich-based Ifo think tank's business climate index, based on a monthly survey of some 7,000 companies, increased to 111.3, beating the consensus forecast in a Reuters poll that it would hold steady at 110.6. Economists said the survey pointed to an economic upturn.

"February's German Ifo survey suggests that the economic recovery has continued to pick up some momentum in the early months of 2014," said Jonathan Loynes, the chief European economist at Capital Economics.

The upbeat reading sent the euro to a day's high and pushed German Bund futures down to a session low.

German sentiment indicators have generally been upbeat in recent months, though a ZEW survey last week showed morale among analysts and investors dropping.

Hard data have been more subdued, with exports, industrial output and orders all falling in December. That has prompted some economists to warn that the economy is not faring as well as the forward-looking "soft" surveys suggest.

Loynes said the Ifo survey had been "consistently over-optimistic" compared with hard data. Combined with a drop in expectations, he said, that supported the case for "steady but unspectacular" growth in Germany.

GOOD SIGNS FOR DOMESTIC DEMAND

While Germany powered ahead early on in the euro zone crisis, its performance weakened over the last two years, and in 2013 it grew at its slowest pace since the global financial crisis. But Berlin expects 1.8 percent growth this year, with domestic demand compensating for weak foreign trade.

The Ifo survey contained some positive signs in that regard, with retailers becoming the most upbeat about their current business situation since spring 2012. Their expectations also improved further.

That tallies with the latest GfK survey, which showed consumers were their most upbeat in 6 1/2 years heading into February. Consumer spending is up - many Germans won strong wage hikes last year, employment is at record levels, and inflation is moderate, while low interest rates are discouraging them from saving.

Ifo economist Klaus Wohlrabe said consumption remained the bulwark of the German economy, with strong orders in the manufacturing sector a key pillar of support.

The domestic economy propelled growth last year, but a detailed breakdown of fourth-quarter gross domestic product (GDP), due out on Tuesday, is expected to show public expenditure was stable and private consumption slightly below its third-quarter level.

Companies were the most positive about current conditions in almost two years, but they became slightly more downbeat about their future prospects.

"German businesses are optimistic but not euphoric," Wohlrabe said, adding that the euro zone recovery would have an impact in the medium term but not in the next couple of months.

He said the export outlook was hit by turbulence in emerging markets, which made firms more cautious.

Some companies have expressed optimism of late, with steel distributor Kloeckner & Co saying the year's first few weeks went well and fashion house Hugo Boss saying it is confident of stronger growth this year.

Manufacturers, who had a weak start to 2013, became more optimistic overall for a fourth consecutive month, though they were slightly more gloomy about their export prospects.

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