Germany proved an exception to the rule of growing global economic gloom as a closely watched business confidence indicator rose on Thursday and the country’s central bank governor said expectations of eurozone interest rate cuts reflected “wishful thinking”.
The surprise rise in the Munich-based Ifo institute’s business climate index, from 103.0 in December to 103.4 this month, reflected greater optimism in Europe’s largest economy about the next six months. German industry – enjoying a renaissance on the back of exports to emerging market economies – has so far been unaffected by the global financial turmoil.
Three-quarters of the responses had been received before this week’s share market turbulence. But the results are still likely to reinforce the European Central Bank’s view that there are no clear signs of a dramatic economic slowdown yet in the 15-country region, in spite of events in the US.
Axel Weber, the Bundesbank president, hinted that at least some on the ECB’s 21-strong governing council would continue to argue strongly against any interest rate cuts, even after the US Federal Reserve’s emergency reduction this week. He said: “We have a positive economic outlook and as long as that doesn’t change I would say that rates are still on the accommodative side and in no way restrictive.”
His use of the word “accommodative” was significant, analysts said, because it was used repeatedly by the ECB last year to signal more interest rate rises were likely. Asked about financial market expectations that the ECB would soon cut rates, Mr Weber said: “There may be a certain wishful thinking priced-in there.”
The ECB’s judgment that eurozone economic fundamentals remain sound is based partly on Germany’s structural reforms this decade. But signs of anxiety emerged in Spain, where Pedro Solbes, the finance minister, claimed on television there was “a significant debate within the ECB about whether to cut rates or not”.
Mr Solbes’s remark could have reflected insider knowledge about the debate at the ECB. However, Holger Schmieding, of Bank of America, suggested the minister might have been attempting “a not-too-subtle, and rather unhelpful, hint” that the ECB should follow the Fed’s rate-cutting example. Spain’s economy is particularly vulnerable to a sharp fall in house prices.
January’s rise in Germany’s Ifo index followed almost continuous falls since last April. While the component of the index covering expectations for the next six months was higher than in December, the component covering businesses’ assessment of current conditions slipped to the lowest level since May 2006. That suggested the overall downward trend would continue but without any dramatic declines, observers said.