German business morale jump buoys eurozone outlook[fr] 

The Ifo economic think tank said  on Wednesday its business climate index, based on a monthly poll of some 7,000 firms, rose to 90.5 from an upwardly revised 87.4 in July. A Reuters poll of 45 economists had pointed to a reading of 88.9.

The rise chimed with other data showing Germany is rallying from its deepest post-war recession, and could offer support for Chancellor Angela Merkel before a federal election on 27 September.

Merkel responded cautiously to the news. Economists said the prospect of rising unemployment and the expiry of stimulus measures still posed risks to Germany's economic outlook.

"I have the impression that we've reached the bottom [of the downturn]," Merkel told N24 television.

"But if we have reached the bottom, the crisis isn't over," she added. "The crisis is over when we are back where we were before the crisis. So the immediate focus is how to get out of the crisis as quickly as possible."

In Spain, European Central Bank Executive Board member Jose Manuel Gonzalez-Paramo said the worst of the crisis had passed.

"It would be premature to say the crisis is over but the freefall has clearly ended," he told news agency Europa Press.

Spain has been hit hard by the global downturn and its economy contracted by 1% in the second quarter, when Germany and France both saw growth of 0.3% and emerged from recession. Italy is still mired in recession.

"We think that Germany will be the star performer within the euro zone over the coming months, reflecting its status as an export powerhouse," said Fortis Bank economist Nick Kounis.

The euro briefly rose against the dollar after the release of the Ifo data, before giving up the gains. Ifo's headline reading rose for the fifth month in a row, hitting its highest level since September 2008.

Risks ahead

News of the rise in business morale followed a report on Tuesday which showed Germany exited recession in the second quarter, despite a massive drop in inventories, and that restocking by firms could spur the economy to faster growth.

Foreign trade also contributed to the recovery. "Global demand is picking up again and Germany, the world's leading export nation, is profiting from that," said Alexander Koch, an economist at UniCredit.

Many economists expect solid growth in the third quarter. A jump in output and expanding order books pulled the private sector out of an 11-month slide and returned it to growth in August, a purchasing managers' survey showed on Friday.

Steelmaker ThyssenKrupp also said earlier this month the construction, automotive, shipbuilding and machinery industries that dominate its customer base showed signs in June of pulling out of a slump that curbed demand for its products.

An Ifo expectations index surged to 95.0 from 90.4, the biggest monthly gain since German reunification in 1990.

Analysts believe the economy should rally as firms ramp up production and rebuild their depleted stocks, though rising unemployment and the expiry of a "cash-for-clunkers" car subsidy plan that has boosted private consumption pose risks to growth.

Bundesbank chief Axel Weber told a newspaper last week that the nascent economic recovery in Germany is largely attributable to government stimulus measures and loose monetary policy and may not yet be sustainable. Many economists agree.

"While the near term looks bright, there are still at least two impediments to a real recovery: the worsening labour market and a possible credit crunch," said Carsten Brzeski at ING Financial Markets.

"Despite the improved outlook and slowly refilling order books, employment expectations in the manufacturing sector are still very bleak," he added.

(EurActiv with Reuters.)