German Business Confidence Tops Five-Year High

The widely watched business climate index, calculated each month by the Ifo economic research institute in Munich, rose to 98.7 points in October from 96.0 points in September, Ifo said in a statement on Tuesday. It was the highest reading since October 2000. And it was way above analysts' expectations -- consensus forecasts had put the October reading only slightly higher at 96.1 points.

"Companies are noticeably more confident about their current situation and they are also more optimistic about the outlook for the next six months," Ifo president Hans-Werner Sinn said.

For its monthly survey, Ifo polls around 7,000 companies about their assessment of current business and their expectations for the next six months.

A breakdown of the data showed that the current sentiment sub-index rose to 98.9 points in October from 96.5 points in September. That was the highest level since February 2001. And the expectations sub-index also surged to 98.5 points from to 95.5 points. The last time the expectations sub-index was so high was in March 2004.

"The economic recovery seems to be gathering pace," Sinn said.

Less uncertainty

Ifo's chief economist Gernot Nerb told AFP in a telephone interview that the surprise rebound was attributable to three main factors.

"Companies are probably relieved that the general election is finally out of the way, even if the result was not to everyone's liking," Nerb said.

In the September 18 vote, neither the governing coalition of Social Democrat SPD and environmentalist Green parties nor the conservative opposition CDU/CSU parties won a ruling majority, forcing both sides into an uneasy grand coalition of left and right. The parties are currently hammering out the details of their coalition with the aim of steering the euro zone's biggest economy back to growth and employment.

Wait and see

But the softer euro and easing oil prices also helped fuel companies' increasing optimism, Nerb continued.

"The fact that the expectations sub-index rose faster this month than the current assessment index indicates that the surge in confidence this month is unlikely to be a flash in the pan," Nerb said. "But recovery is still at an early stage and we'll need data from a few more months to see if the recovery is going to become more self-sustaining," he cautioned.

Ifo was therefore sticking to its current forecast for German growth of 0.8 percent this year and "continued moderate growth next year," Nerb said. "We'll wait a bit before we decide whether to change that."

And he also said that the think tank would advise the European Central Bank not to be too hasty in raising its key interest rates in face of the rosier growth outlook. "There's room to wait at least until next year," Nerb said.

The ECB has held its key interest rates at 2.0 percent since June 2003 but has recently stepped out its anti-inflation rhetoric, sparking speculation it could be preparing to tighten monetary conditions in the 12-country euro zone soon to keep a lid on inflation as economic recovery gathers momentum.