German Investor Confidence Tops 22-month High

Investor confidence in Germany surged to the highest level in nearly two years this month, a poll showed on Tuesday, reinforcing expectations that the emerging recovery in the eurozone's biggest economy will gather momentum next year, analysts said.

The ZEW economic research institute's economic expectations index, a widely watched confidence indicator in Germany, surged by 22.9 points to plus 61.6 points in December. That was far higher than consensus forecasts of around 41 points and put the index at its highest level since February 2004.

The surge was all the more impressive since it showed that the recent rise in eurozone interest rates has done little to dent investor confidence.

Better than expected

Eurozone politicians had argued that the decision by the European Central Bank earlier this month to raise the cost of borrowing in the 12 eurozone countries would choke off the nascent economic recovery, particularly in sickly Germany.

But the ZEW barometer showed that investors remained unconcerned by the quarter-point rise in ECB rates to 2.25 percent. Investors' confidence had been boosted not only by the softening of the euro and the buoyancy of the global economy, but also by the pick-up in corporate spending, ZEW found.

"An important factor for the rising optimism is the increased readiness of companies to invest," said ZEW President Wolfgang Franz.

"In addition, the euro-dollar exchange rate and the broad global economic strength are boosting the outlook for exports over the next six months," the think tank's chief said.

Measuring hopes and fears

The ZEW indicator represents the balance between positive and negative expectations for the economy over the next six months. If most analysts and institutional investors polled believe the economy will improve, the index shows a plus. If most are expecting a deterioration, the index shows a minus.

ZEW also polls analysts and institutional investors about their assessments of the current situation. The so-called "current situation index" also showed a strong improvement, with a reading of minus 44.4 points in December, compared with minus 55.2 points in November.

German Economy Minister Michael Glos saw the data as confirmation of the current economic recovery.

"Not only ZEW, but other confidence indicators are also pointing to a further expansion of economic activity," Glos said in a statement released in Berlin.

Analysts also were cheered by the news.

"It's the biggest jump in the index since March 1993," said IXIS economist Sylvain Broyer, who attributed the rise to the year-end rally on the stock markets, the slowdown in inflation in Germany and investors' belief that the ECB was not about to embark on an aggressive series of rate increases.

On the way to sustainable growth

Indeed, "the strong increase in investors' confidence could herald a stronger-than-expected pick-up in GDP (gross domestic product) growth in 2006," Broyer said.

"Germany is definitively on the way to sustainable growth," the analyst concluded.

Broyer said he would likely revise upwards his forecast for German growth next year to "something like 2.0 percent," while HSBC Trinkaus und Burkhardt economist Thomas Amend said he was pencilling in growth of "a good 1.5 percent" for 2006.

UBS economist Holger Fahrinkrug suggested that increased clarity over the new government's economic policies had also contributed to the strong surge in the December ZEW reading. But he cautioned that at its current level, the index was probably close to its peak.

With regard to interest rates, Fahrinkrug said the ZEW data would "underpin the ECB's assessment that euro-area growth is now on a more solid footing and does not require monetary accommodation." Indeed, the guardian of the euro would now be more likely to raise its key rates by another three quarters of a percentage point to 3.0 percent in the coming three quarters, he said.

"If subsequent data comes out as strong as ZEW, it might even speed up the tightening process," Fahrinkrug concluded.