German business confidence up less than expected

May 25, 2009 9:51:55 AM PDT
German business confidence rose less than expected in May as sluggish demand weighed on construction and manufacturing, but the six-month outlook improved. The Munich-based Ifo institute's business climate index increased to 84.2 points in May from 83.7 points in April, it reported Monday, the second consecutive increase since March, when the indicator hit a 26-year low of 82.2 points.

"The good news clearly is that German companies will leave the valley of tears in a few months' time," said Andreas Rees, chief German economist for UniCredit in a research note.

But he said that while the six-month outlook was promising, the current conditions showed businesses still mired in the recessionary muck.

"By looking at the current assessment reading, one thing has also become crystal-clear: The recession will continue for the time being," he said.

In a statement, Ifo said that manufacturers reported a poorer business situation this month than in April, but expect improvement in the next six months.

In wholesaling and retail, the climate has already improved.

"Retailers are no longer quite so dissatisfied with their current business situation and anticipate a less unfavorable six-month business outlook," Ifo said in the report.

Construction companies reported less satisfaction with their current situation as well as a less favorable outlook than in April.

That weighed on the overall indicator, bringing it below the 85.9 points Ifo had expected and the 85 points predicted by UniCredit in a note to investors.

Timo Klein, an economist with IHS Global Insight, said the survey suggested that in the second and third quarters of this year, the economy would likely recover from the plunge of late 2008.

Germany's economy went into recession last fall as the global economic crisis sapped demand for its exports.

"The critical factor is whether global demand and thus exports - notably of the manufacturing sector - will be able to recover sufficiently in coming months to prevent firms from giving up hope" and resorting to layoffs instead of shorter work weeks, Klein wrote in a research note to clients.

The government has forecast that the economy will shrink a huge 6 percent this year, followed by a feeble 0.5 percent return to growth in 2010.

Germany's economy grew 1.3 percent in 2008, about half as much as the previous year.

Ifo's overall survey is based on responses from more than 7,000 businesses.


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