Surge in German investor confidence

German investor confidence has surged to a 10-month high, according to a survey published on Tuesday, cheered by improving labour markets and increasing domestic investment demand.

The Mannheim-based ZEW institute’s “economic sentiment” index rose more than expected by 10.7 points to 16.5 points this month, the highest since June last year.

The fifth consecutive monthly increase highlighted the momentum behind the recovery in Europe’s largest economy – and suggested it was far from being blown off course by the strengthening euro. The ZEW is regarded as a good indicator of future economic activity.

“The economic upswing is now being felt in the labour market. It is particularly pleasing that the number of employees paying social insurance contributions is increasing,” Wolfgang Franz, ZEW president, said on Tuesday. However, the recovery had not yet helped low qualified people or the long-term unemployed, he said.

The upbeat tone of the latest survey chimed with the optimistic mood among German industrialists at this week’s high-profile trade fair in Hanover, northern Germany. The country’s BDI industry association has raised its German growth forecast for 2007 from just under 2 per cent to 2.5 per cent.

The ZEW index tumbled in the second half of 2006 amid fears that the economy would be hit by a stronger euro, a slowing US economy, higher eurozone interest rates and a three percentage point rise in German VAT in January this year. The subsequent rebound in the index suggests those fears were exaggerated.

The ZEW survey said that investors’ assessment of current business conditions – rather than expectations about the next six months – was the most optimistic since the survey started in December 1991.

Nevertheless, the latest ZEW index reading was still significantly below its historical average of 33.1 points and the effects of a stronger euro could feed through in coming months. Against the dollar, the euro is fast approaching the peak of $1.3670 in December 2004.

Matthias Rubisch, an economist at Commerzbank, said it was still unclear what effect the VAT increase might have had, and other factors such as the US slowdown and stronger euro could hit activity as the year progressed. Although growth would remain solid, “we do not expect a return to the high rates achieved last year,” he said.

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