German Business Confidence Soars Again

Business confidence in Germany in June surged to a level last seen just after reunification in 1991, a survey showed on Tuesday, confirming that Europe's biggest economy remains on the road to recovery.

The widely watched Ifo business climate index rose to 106.8 in June from an upwardly revised 105.7 in May.

The part of the index measuring current conditions climbed to 109.4 from 107.3 in May, far exceeding the expectations of economists who had forecast a level of 107.5.

Economists said the June reading was the highest Germany had scored on the ifo index in 15 years and speculated that this might at least in part due to the German soccer team's success thus far in the World Cup, which Germany is hosting.

"The overall reading is at its highest since February 1991," said Stephane Deo, an economist at UBS Investment Research, who attributed the swell of confidence to the weaker dollar and sanguine industrial indicators.

But Erik Sonntag, an analyst at ING, said the world's biggest sporting event may well also have played a role in buoying the host nation's business mood.

"The euphoria created by the World Cup and the success so far of the German side has perhaps also helped to boost confidence," he said.

Robust recovery

The ifo index is generally taken in Germany to be a reliable measure of how the economy will fare in the near future.

Gebhard Flaig, ifo's director, said there was no doubt that the June rating proved that "the economic recovery remains robust."

But Alexandre Bourgeois from Natexis Banques Populaires said the index was beginning to show itself out of step with the real rate of improvement in Germany's long moribund economy.

"The index has been showing spectacular readings for just over a year now, but while the recovery of the German economy is real, it remains modest," he said.

Germany's gross domestic product (GDP) grew by only 0.9 percent in 2005. The government is predicting an increase of 1.6 percent for this year and some economists say it could be as high as 2.0 percent.

General European upturn

Speculation about the accuracy of the index aside, analysts remarked that the German improvement was in line with a general European upturn detected by ifo.

"Apart from Germany, the business climate also improved in Italy, the Netherlands and Belgium in June. In France it dropped a little, but remained at a relatively high level," remarked Holger Sandte, an analyst at WestLB.

Both Italy and the Netherlands registered the highest levels they have scored on the Ifo index in the past five years.

This newfound confidence among Europe's companies backs up the forecasts of the European Central Bank for a euro-zone economic recovery.

ECB President Jean-Claude Trichet recently warned of the risk of a sharp increase in inflation, signaling clearly that interest rate hikes were in the cards, with most economists expecting it to happen at the end of August.

Sonntag said however that given the positive ifo numbers "the ECB may consider implementing rate hikes sooner."