German, French business buoyant despite U.S. gloom

By Paul Carrel

BERLIN (Reuters) - Business confidence in the euro area's two biggest economies unexpectedly improved in March, suggesting the region is eluding damage from a sharp U.S. slowdown and quashing hopes for a swift ECB interest rate cut.

The buoyant sentiment readings from Germany and France eclipsed news that Italian business confidence fell to its lowest level in over 2-1/2 years, and propelled the euro higher as expectations of a rate cut receded.

The robust French and German morale confounded the sense of doom and gloom in financial markets, which was compounded on Wednesday when Germany's biggest lender Deutsche Bank (DBKGn.DE) said credit market aftershocks could hit its 2008 profits.

Belgian business confidence, often seen as a bellwether for the euro zone, also unexpectedly rose in March, climbing for a third month running as sentiment improved among retailers and manufacturers.

"Today's figures suggest that, although slowing, manufacturing activity in the euro area is looking more resilient than expected so far, albeit with emerging differences across countries," said Lavinia Santovetti at Lehman Brothers.

"These numbers will likely give some comfort to the ECB as the impact of the financial market turmoil appears, so far, limited overall," Santovetti said in a research note.

The Ifo economic research institute's German business climate index rose to 104.8 in March from 104.1 in February, bucking expectations for a fall and hitting a seven-month high.

The survey was marked by a rise in its manufacturing sector component. German industry has made productivity gains in recent years and enjoys strong demand from emerging markets.

European Central Bank President Jean-Claude Trichet noted that the Ifo reading was "better than expected". He also told the European Parliament he saw upward risks to price stability in the medium term, denting expectations for a rate cut soon.

FRANCO-GERMAN AXIS

In France, business morale hit its highest level this year as firms reported fuller order books.

"There is an improvement in foreign orders and my hunch on this is that it might be a consequence of quite strong industrial activity in Germany which is filtering through to France," said Bank of America economist Gilles Moec.

Germany is France's top trading partner. Together, the two account for around half of the euro zone's economic output.

The upbeat sentiment surveys contrasted with reports from the United States on Tuesday, showing consumer confidence in the world's largest economy plunged to a five-year low this month.

"It is clear that the risk factors which are rattling the (German) economy -- concerns about a recession in the United States, the exchange rate and other things -- are leaving little trace on industry," said Dresdner Kleinwort's Rainer Guntermann.