German business confidence returns

Growth in Germany's manufacturing sector has helped lift business confidence

FRANKFURT, Germany -- Confidence among German business leaders rebounded in May, signalling that a recovery in Europe's largest economy is beginning to take hold.

The closely watched Ifo business climate index -- based on a monthly survey of about 7,000 west German companies -- rose to better-than-expected 91.5 points in May from 90.5 in April. Economists had been expecting a rise to 90.6 in May.

"It is a positive surprise. We had seen some reasons for it to be weaker. This suggests the trend is still firmly intact and [last month's] dip seems to have an aberration," Glenn Davies, an economist at Credit Lyonnais, told Reuters.

The rise in confidence followed an unexpected drop in the Ifo index the previous month. The positive numbers also come on the heels of economic data last week which showed the German economy grew in the first quarter after contracting in the second half of 2001.

"This confirms that the April drop [in the confidence index] did not signal trend change but was a one-off," Joerg Kraemer, an analyst at Invesco Asset Management, told Reuters.

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The Ifo institute said May's rise was helped by improved exports, which power much of Germany's economy.

"More favourable reports from manufacturing industry and wholesalers contributed to the improvement,'' Hans-Werner Sinn, president of the Munich-based Ifo economic institute, said in a statement on Monday.

But he added that Germany's retail and construction sectors were still weak as the country continues to struggle out of recession.

Another Ifo index -- tracking companies' view of business six months ahead -- was also higher in May. It rose to 106.1 points from an revised 104.7 in April.

In addition, Ifo's current business conditions index climbed to 77.6 points in May from a revised 77 the previous month.

"The only negative is that at the moment it [the rise in confidence] is mostly based on expectations," Credit Lyonnais' Davies said. "In the current business index there is obviously not much of an improvement yet. So recovery is still more in hopes for the future rather than a reality."

On Thursday, the Federal Office of Statistics said the German economy grew by a stronger-than-expected 0.2 percent in the first quarter of this year after declining by 0.3 percent in the previous quarter. Analysts had expected quarterly growth of 0.1 percent.

Germany slipped into recession last year, along with the United States and Japan, as the global downturn and the impact of the September 11 attacks in the U.S. slowed demand.

But as the recovery takes hold in the U.S. -- the destination of most of Germany's exports -- the German economy is also expected to strengthen. Economists are forecasting growth of 0.9 percent for all of this year and 2.4 percent expansion in 2003.

The gradual recovery has brought growing speculation that the European Central Bank may soon raise interest rates after cutting borrowing costs four times last year, in an effort to ease the impact of the global slowdown.

The Ifo survey "fits with [the ECB's] idea the economy is returning back to potential growth," said Davies of Credit Lyonnas. "Clearly the fact growth is still heading in the right direction make it easier for them to justify a rate hike."