* Ifo business index 106.2 vs 105.9 in June
* Analysts say German economy picking up but no boom
* Uncertainty over euro zone crisis still weighs on firms
By Sarah Marsh
BERLIN, July 25 German business morale edged up
for a third straight month in July in a sign Europe's largest
economy is picking up steam and should post modest growth in
this election year, although the euro zone's travails still
weigh on the mood.
A bastion of strength in the early years of the currency
bloc's crisis, the German economy narrowly avoided recession at
the start of 2013 as a worsening global outlook diminished
appetite for its products and willingness to invest.
Yet recent data suggests Europe's growth locomotive
tentatively recovering thanks mainly to domestic demand - good
news for Germany's trade partners within the euro zone, where
private industry bounced back to growth this month.
The Ifo think tank said on Thursday its business climate
index, based on a monthly survey of some 7,000 firms, rose to
106.2 in July from 105.9 in June. The reading was just above the
consensus forecast in a Reuters poll of 40 economists for 106.1.
"July's small rise in the German Ifo adds to evidence that
the economy is recovering, but the recovery is likely to be
modest," said Jennifer McKeown at Capital Economics. "Recent
weak hard data on trade and industrial production were a warning
not to get too carried away about the speed of the recovery."
The recent picture has been mixed although it suggests the
economy is gaining traction. Industry orders and output tumbled
in May, yet a purchasing managers' index (PMI) showed the
manufacturing sector returning to growth in July.
Non-industrial data has picked up more, with consumer morale
improving, retail sales rising and joblessness falling in stark
contrast to the soaring unemployment in much of Europe.
Munich-based Ifo said companies were more optimistic in July
about their current business, with the conditions sub-index
rising to 110.1 from 109.4 in June.
Reflecting the improved mood, Germany's Mercedes-Benz Cars
said this week it expected good sales in July and the
second half of the year.
Ifo economist Klaus Wohlrabe said the institute now
expected the economy to have expanded 0.9 percent in the second
quarter, picking up after just 0.1 percent in the first three
months of 2013, putting it on-track for full-year growth of 0.6
THE EURO ZONE ALBATROSS
The economy has not become a major election issue ahead of a
national vote on Sept. 22 and is unlikely to if it remains
robust and unemployment stays low, boding well for German
Chancellor Angela Merkel as she seeks a third term in office.
The government, which claims it has the strongest track
record of any since reunification due to the economy's solid
performance, expects growth of 0.5 percent this year.
Economists said the strength of the recovery depended still
on further developments in the euro zone crisis. Many German
firms are holding off on investments due to uncertainty and
struggling to sell their goods to key European trade partners.
Shipments to other parts of the euro zone, where Germany
sends 40 percent of its goods, fell 9.6 percent in May, data
showed earlier this month.
"It all still remains conditional on the rest of the euro
zone holding steady and contagion pressures easing," said David
Brown at New View Economics.
"The euro zone still remains the albatross round the German
recovery's neck," he added.
This uncertainty was mirrored in the Ifo sub-index for
firms' business outlook, which inched down one tick to 102.4.
Economists said a slowdown in China, and the intentions of
the Chinese leadership to switch from an export-oriented economy
to a more consumer-led model could also threaten German growth.
"German export companies are specialised in capital goods,
which have benefited strongly from the investment boom in the
BRIC countries," said Peter Vanden Houte at ING. "With also
signs of slower growth in Brazil and Russia, export growth
prospects remain therefore challenging."
Vanden Houte noted however that traditionally
export-oriented Germany was no longer as reliant itself on
foreign demand. "With very low unemployment, some fiscal
stimulus and a reviving real estate market, domestic demand is
also contributing to the economic expansion," he said.