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German Business Morale Hits 7-Month High: Ifo

Reuters
Wednesday, 26 Mar 2008 | 7:27 AM ET

Corporate morale in Germany unexpectedly rose in March to its highest level in seven months, defying the strong euro and suggesting Europe's largest economy is increasingly resistant to problems in the United States.

The Ifo research institute said on Wednesday its business climate index, based on a monthly poll of around 7,000 firms, rose to 104.8 from 104.1 in February. It was the third rise in a row and took the index to its highest level since August.

Following the data -- which beat the Reuters consensus forecast for a drop to 103.4 -- the euro erased losses against the dollar and Bund futures turned negative.

"These results indicate that with the beginning of the year the German economy has gained strength," Ifo said, adding the outlook for the next six months had also brightened.

The rise in sentiment dampened any expectations the European Central Bank could follow its U.S. and British counterparts by cutting interest rates in the near future.

Hans Guenter Russ, an economist at the Munich-based think tank, told Reuters recent data showed German economic activity was becoming less dependent on the U.S. economy, which a number of leading analysts have said may already be in a recession.

"Although the U.S. economy is still the main locomotive, the German economy has decoupled itself," he said in an interview.

The United States has been stung by a marked downturn in its housing market which has hit banks and rattled consumers.

Russ noted German industry was upbeat about its export prospects, despite the euro's surge to record highs over the past month, and were planning to hire new staff to meet demand.

Firms regard oil prices, which soared above $110 per barrel earlier in March, as their "number one" risk, he added.

Supernatural Powers?

Separate data on Wednesday showed business morale in France -- the euro zone's second biggest economy -- rose in March, though in Italy, it fell to its lowest level in 31 months.

Postbank economist Brian Mandt said the third consecutive rise in the Ifo index showed that the recent run of impressive data from Germany were no "flash in the pan."

Other analysts were more skeptical.

Andreas Rees, an economist at Unicredit in Munich, said German companies were giving the misleading impression that they were "supernatural and hence imperturbable."

"We do not believe in an outright 'Superman scenario' in 2008," he said. "It is a question of time. The plunging U.S. economy and the stronger euro exchange rate will leave their trace on the German economy in the second half of this year."

While manufacturers have been upbeat of late, other sectors of the economy have been showing signs of strain.

Germany's biggest bank Deutsche Bank said on Wednesday asset writedowns and disruption to revenues stemming from global credit turmoil could threaten its 2008 profit goal.

Builder Hochtief said on Wednesday it expected earnings before taxes would be flat in 2008 as its units outside Europe may be burdened by the euro and declining new orders.

Juergen Michels, an economist at Citigroup in London, said that growth was likely to slow in coming months.

"However, business sentiment readings highlight that Germany is much better prepared to weather the euro storm than its large euro zone peers (thanks to) improved competitiveness," he said.