German business confidence rises

Bloomberg

The Ifo institute in Munich yesterday said its business climate index, based on a survey of 7,000 executives, increased to 84.2 from 83.7 in April. Economists expected a gain to 85, the median of 39 forecasts in a Bloomberg News survey showed. The index reached a 26-year low of 82.2 in March.

Chancellor Angela Merkel’s coalition is trying to pull Germany out of recession with a spending plan worth about 82 billion euros ($115 billion). While the government expects the economy to contract 6 percent in 2009, Bundesbank President Axel Weber says there are "some grounds" to be optimistic about a recovery later this year.

"Companies increasingly see that the situation simply can’t deteriorate further," said Holger Schmieding, chief European economist at Bank of America-Merrill Lynch in London. "The economy will grow slightly in the third quarter."

German manufacturing activity contracted at the slowest pace in seven months in May, Markit Economics said May 21, and investor confidence rose more than economists forecast this month, climbing to a three-year high.

"The pace of contraction has weakened and some leading indicators have noticeably recovered," the Bundesbank said in its monthly report last week. It will take time for the full impact of the government’s stimulus program and the European Central Bank’s "very expansive monetary policy" to flow through, it added.

Central bank policy

The ECB this month cut its benchmark rate to 1 percent, a record low, and announced it will buy 60 billion euros of covered bonds to revive lending. ECB President Jean-Claude Trichet also didn’t rule out another reduction of the bank’s key rate. "We did not decide that the new level of our policy rates was the lowest level," he said.

The global slump in demand is forcing companies to scale back production and cut jobs as earnings wilt.

"Capacity utilization is extremely low, more companies will go bankrupt and the labor market will suffer," said Peter Meister, an economist and bond analyst at BHF Bank in Frankfurt. "We’ll see a certain stabilization of the economy, but this won’t be a proper upswing."

Germany’s leading economic institutes predict the country will lose 1.4 million jobs this year and next, pushing the average number of unemployed to a five-year high of 4.7 million. German unemployment rose for a sixth straight month in April, taking the jobless rate to 8.3 percent.