Weak euro, QE work magic on German sentiment

German business sentiment in March hit its highest level in eight months, the Ifo index showed Wednesday, in the latest sign that a weak euro and monetary stimulus are working their magic on Europe's biggest economy.

The closely watched headline Ifo index rose to 107.9 in March from 106.8 in February and above expectations for a reading of 107.3 by analysts polled by Reuters.

Shoppers browse items for sale inside a gift shop in Mannheim, Germany.
Krisztian Bocsi | Bloomberg | Getty Images

The news is in line with figures from the ZEW institute released last week showing investor sentiment in Germany rose to its highest level in just over a year in March.

The Markit Economics purchasing managers index (PMI) for the manufacturing and services sector, released Tuesday, rose to 54.1 in March from 53.3 in February.

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"These numbers – the Ifo today and the euro zone PMI yesterday – show momentum for the region as a whole is strengthening," Daniele Antonucci, European Economist at Morgan Stanley told CNBC.

"There are three tailwinds for the euro zone economy this year – currency weakness, lower interest rates as a result of QE [quantitative easing] and lower oil prices," he said.

Earlier this month, the European Central Bank launched a 1 trillion euro ($1.09 trillion) monetary-stimulus program to boost economic growth in the 19-member euro zone.

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That accelerated a fall in the euro, giving the region's exporters a competitive edge abroad. The single currency has fallen almost 21 percent against the dollar in the past year.

On Wednesday, however, the euro climbed towards $1.10 as the strong Ifo business sentiment survey boosted expectations for an economic recovery in the euro area.

"The German IFO business climate data was as healthy as it could be, and have printed another strong reading this morning. This has pushed the euro up which was already trading higher this morning," Naeem Aslam, chief market analyst at AvaTrade, said in a note.

Jessica Hinds, European Economist at Capital Economics, said Greece remained the key risk to German business sentiment going forward.

Germany and Greece have been at odds over efforts made in Athens to renegotiate the terms of its international bailout. And concern is growing that Greece could be facing another near-term cash crisis soon.

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"While German firms have dismissed concerns about Greece, there is a clear risk that the crisis intensifies and starts to weigh on business activity in Germany," Hinds said in a note.

"Accordingly, we expect slightly more modest GDP growth than the Ifo suggests of around 1.5 percent this year and next. But this would not be enough to eradicate deflation risks elsewhere in the euro-zone," she added.

- This story was updated to correct quote in paragraph six, which should read tailwinds not headwinds.

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