August 27, 2013 1:11 pm

German business confidence at 16-month high

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German business confidence rose to a 16-month high, a survey showed on Tuesday, but there are still big questions over whether the export-driven manufacturing sector has shaken off caution triggered by the eurozone’s debt crisis and global economic uncertainty.

The business climate index in the monthly Ifo survey of 7,000 German companies rose to 107.5 in August, from 106.2 in July, beating market expectations. Manufacturing sentiment rose while there was a slight fall in retailers’ assessments of the business climate.

The survey is the latest in a series of indicators bolstering the economic feelgood factor in the eurozone’s biggest and strongest economy as voters prepare to elect a new parliament in less than a month’s time. In stark contrast to the mass unemployment afflicting other euro area nations such as Spain and Greece, German joblessness remains near record lows.

The positive Ifo survey follows a strong purchasing managers’ index for both Germany and the wider eurozone last week. But in spite of the momentum – Germany moved strongly further into growth in the second quarter after a feeble start to the year – companies have been circumspect about their prospects.

“The economic environment is and remains volatile,” Kurt Bock, chief executive of BASF, the world’s biggest chemicals maker by sales, said last month. The company does not expect global economic growth or demand for chemicals to recover in the second half of the year.

The detailed components of Germany’s second-quarter gross domestic product growth, released last week, showed an improvement compared with the previous quarter in investment in plants and machinery, but year-on-year gross fixed capital formation in machinery and equipment fell 1.2 per cent, the fifth such quarterly fall.

That hesitancy to use cash to invest in equipment in order to expand production in the expectation of a strong upswing indicates that manufacturers remain very cautious about the markets in which they operate. And while the expectations element of the Ifo survey rose in August, to 103.3 from 102.4 in July, it continues significantly to lag behind the assessment of current conditions.

“Despite the favourable Ifo sentiment index, one should ask whether the German economy will be able to hold up against the increasing problems in the emerging markets,” Jörg Krämer, chief economist at Commerzbank, said, noting that the Ifo survey had not in the past “decoupled” from the underlying trends in emerging markets.

“We would therefore warn against simply extrapolating the recent, very strong figures for Germany,” he said.

Despite the favourable Ifo sentiment index, one should ask whether the German economy will be able to hold up against the increasing problems in the emerging markets

- Jörg Krämer, chief economist at Commerzbank

While other economists have taken a more upbeat line – Allianz’s Rolf Schneider said machinery investment was “likely to improve significantly” in coming quarters – the tenor of company commentary has been decidedly gloomy.

Siemens, Germany’s largest engineering company, cautioned last month that the slowdown in China would be more protracted that many expected.

This month, Christian Klingler, head of sales at Volkswagen, Europe’s biggest carmaker by sales, warned that although demand for VW vehicles continued to expand at the start of the second half “conditions on some markets were at times extremely challenging”.

Lanxess, the speciality chemical maker, cautioned that “trading conditions for our businesses remain tough and the fragile sentiment in Europe is now evident in other markets that are important for us, such as China and Brazil”.

Meanwhile, Salzgitter, the German steelmaker, warned of a continued “structural crisis in the European steel industry” which had pushed the selling prices achievable for most rolled steel products below the manufacturing costs. “There is still no sign of a major economic recovery in the eurozone,” it warned. “Accordingly, the general environment in which the Salzgitter group conducts its business is unlikely to improve in the months ahead.”

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