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Data Suggests Europe's Largest Economy Picking Up Steam

Alexander Hassenstein | Getty Images

German business morale improved far more than expected in May, rebounding after two months of falls and suggesting Europe's largest economy is slowly picking up speed after a sluggish first quarter.

The Munich-based Ifo think tank said on Friday its business climate index, based on a survey of some 7,000 firms, rose to 105.7 in May from 104.4 in April.

The data beat a median forecast of 104.5 in a Reuters poll of 40 economists.

It prompted German Bund futures to pare gains and sent the euro to a session high, though analysts said the recovery did not look strong enough to help drag Germany's euro zone neighbours out of recession.

Underscoring how private consumption in particular is fueling domestic growth, a separate survey showed German consumers feeling more inclined to spend than at any point since September 2007.

"Business sentiment is recovering, consumer sentiment is picking up and Germany has been spared a double dip recession by the skin of its teeth," said David Brown at New View Economics.

"The German economy may be out of casualty ...but a return to fuller health still needs a lot more care."

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The economy, which grew strongly during the early years of the euro zone crisis but lost momentum last year, has not yet featured prominently in campaigning for September's national election.

But if conditions worsen significantly, it could become a headache for Chancellor Angela Merkel as she seeks a third term in office.

Her cabinet forecasts an expansion of 0.5 percent this year, but quarterly growth was just 0.1 percent in the first three months, Statistics Office data showed earlier on Friday.

Robust private consumption compensated for declines in both exports and investment, the office said.

Ifo economist Klaus Wohlrabe expected the German economy to grow significantly more in the second quarter, saying construction activity, which was subdued during an extremely harsh winter, picked up "immensely" in May.

Consumers to the Rescue?

Private consumption added 0.4 percentage points to first quarter GDP, while gross capital investment deducted 0.3 points. Foreign trade added 0.1 points as

exports fell but imports dropped even more rapidly.

Confirming the growing importance of private consumption for the economy, market research group GfK said its forward-looking consumer sentiment index,

based on a survey of around 2,000 Germans, rose for the sixth straight month.

"Germany's consumers ride to the rescue," said Christian Schulz, economist at Berenberg Bank.

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A more sanguine Carsten Brzeski at ING said Germans would still not "become a bunch of shopaholics" and spend wildly.

"This means ... this morning's data also hold an inconvenient truth...without its exports, the German economy is currently only like a sports car without sixth gear," he said.

Suggesting even private consumption cannot be relied on for solid growth, a finance ministry report released on Friday showed that, while the tax take rose 0.4 percent on the year in April, sales tax dropped by 7.3 percent.

Jennifer McKeown at Capital Economics added that the Ifo index had "long painted an overly optimistic picture of the German economy" and Markit's purchasing managers' survey (PMI) released on Thursday suggested it was contracting.

"Accordingly, we still expect only a modest pick-up in German GDP growth which will not be strong enough to ensure a recovery in the euro zone as a whole," McKeown said.

Nonetheless Germany is outperforming other euro zone countries, and recent data showed its industrial output and orders, as well as imports and exports, rose in March.