German Business Confidence Up Despite Strong Euro

German business confidence rose unexpectedly this month despite the euro's increasing strength, a closely watched survey showed Wednesday, and the government underlined the growing optimism by raising its outlook for Europe's biggest economy.

The Ifo institute's monthly confidence index rose to 108.6 points in April from 107.7 in March, its second consecutive increase. Analysts surveyed by Dow Jones Newswires had forecast that it would remain static.

Separately, the government raised its 2007 growth forecast for the second time this year, predicting that gross domestic product would increase by 2.3%.

That would put growth in the German economy, Europe's biggest, a little short of last year's 2.7%, which was its best performance since 2000. Stronger spending at home has bolstered a sustained export boom.

"Germany is profiting from the extraordinary international investment boom, which due to Germany's specialization is having a stronger cyclical impact than in the other major European countries," Ifo president Hans-Werner Sinn said in a statement.

German manufacturers, Sinn added, "are also more optimistic regarding exports despite the stronger euro."

The 13-nation European currency has been flirting with its record high against the dollar, which dates back to late 2004, amid concerns over the strength of the U.S. economy - a development that threatens to make German exports more expensive.

Ifo, which surveys some 7,000 companies every month, found that businesses' view of both their current situation and their six-month outlook improved in April.

Raised Growth Forecast

A portion of its index measuring current conditions rose to 113.2 points from 112.4, while the section measuring companies' expectations rose to 104.3 from 103.2.

The government raised its growth forecast from the 1.7% estimate it gave in January.

Forecasts for this year have been below last year's figure because Germany raised its value-added tax to 19% from 16% on Jan. 1 in a move aimed largely at keeping the country's budget deficit in check.

However, rises in business, investor and consumer confidence surveys have suggested that the impact of that move was limited.

Ifo's Sinn said that the climate in the retail and wholesaling sectors has "brightened noticeably."

That suggests "that the negative momentum caused by the VAT hike is definitely over," Andreas Rees, an analyst at UniCredit in Munich, said in a research note.

He said Wednesday's survey was "very encouraging, since the euro exchange rate often acted as a kind of trigger for a strong and sustained downturn in business sentiment in the past."

Rees noted that "what really counts for German companies is not the (euro-dollar) level, but the speed of the adjustment." That has been gradual recently.

He forecast economic growth this year of between 1.6% and 2.1%, and raised the possibility of an even better performance.

"The major reason is that robust export growth will continue, thereby providing substantial spillover effects for domestic demand," Rees said. "The odds are high that the German economy is currently embarking on a self-sustained upswing."

For next year, the government forecast 2.4% growth.

Economy Minister Michael Glos said that "we still remain on the cautious side" with the revised growth forecast, and also appeared relaxed about the euro's strength.

"German business is obviously coping well with the current dollar-euro rate," Glos told reporters - although, he added, "if it were to rise again strongly, that would mean risks."

Glos noted that the weaker dollar also cuts the cost of oil and gas, which are priced in dollars.