German Business Confidence Unexpectedly Increases

German business confidence unexpectedly rose to the highest level in more than three years in September, suggesting companies can weather weaker demand from abroad as the global economic recovery slows.

The Munich-based Ifo institute said its business climate index, based on a survey of 7,000 executives, increased to 106.8 from 106.7 in August. That’s the highest since June 2007. Economists had expected a drop to 106.4, according to the median of 36 forecasts in Bloomberg News survey.

Europe’s largest economy expanded at the fastest pace in two decades in the second quarter as companies ramped up production to fill booming export orders. While data indicate a loss of momentum since then, the Bundesbank this week said the recovery “remains intact” as companies including truck maker MAN SE raise profit forecasts and falling unemployment boosts private consumption.

“The German economy remains the showcase of the euro zone,” said Carsten Brzeski, an economist at ING Group in Brussels. “Of course, second-quarter growth was unique and a slowdown is inevitable. However, with richly filled order books, increasing investment and production plans and a strong labor market, prospects for the German economy still look promising.”

The euro rose three quarters of a cent after the report to $1.3397 at 10:45 a.m. in Frankfurt. It has gained 5.6 percent against the dollar in the last two weeks.

Expectations

Ifo’s gauge of the current situation increased to 109.7, the highest since May 2008, from 108.2. A measure of executives’ expectations fell to 103.9 from 105.2.

The rise in the main index “was totally due to a jump in the current conditions indicator,” said Aline Schuiling, an economist at ABN Amro in Amsterdam. “The expectations index is a better tracker of current growth and its decline signals that the German economy is slowing to more moderate growth rates following its stellar performance in the first half of this year.”

The economy expanded 2.2 percent in the second quarter, prompting the Bundesbank to raise its 2010 growth forecast to 3 percent from 1.9 percent.

Since then, reports showed that factory orders unexpectedly declined in July and manufacturing activity eased for a second month in September.

U.S. Slowdown

Weaker growth and low inflation in the U.S. prompted the Federal Reserve to signal this week that it may embark on a second wave of unconventional monetary stimulus to support a recovery. Expansion in the world’s largest economy will ease to 2.5 percent next year from 2.7 percent this year, according to another survey of economists.

German companies are looking east to boost profits. SAP AG’s co-Chief Executive Officer Bill McDermott said on Sep. 3 the software maker aims to make China “a second home” as local companies seeking management tools and real-time business intelligence will provide “limitless growth.”

Bayerische Motoren Werke AG, the world’s largest maker of luxury cars, said on Sep. 16 it plans to add models and start a vehicle-leasing business in China to help boost its presence in the world’s biggest auto market. Car exports from Germany to China tripled in the first half of the year to 128,000, the Federal Statistics Office said on Sep. 21. That exceeds the 122,000 cars shipped to China in 2009.

Debt Crisis

Germany’s strength contrasts with the weakness in some countries on the periphery of the euro area that have been hit by the region’s sovereign debt crisis. Ireland’s economy shrank 1.2 percent in the second quarter, a report showed yesterday. The premium investors demand to hold Irish and Portuguese government bonds over their German equivalents rose to records this week.

Even as export growth slows, Germany’s recovery may be bolstered by rising consumer spending.

To help fill orders, companies are adding staff. Daimler AG, which raised its 2010 operating forecast on July 27, has taken on 1,800 temporary workers, while Volkswagen AG, Europe’s largest car maker, will offer permanent employment to 400 short- term hires.

Unemployment dropped for a 14th month in August, pushing consumer confidence to an 11-month high in September. Germany’s HDE retail association yesterday raised its 2010 sales growth forecast to 1.5 percent from zero.

“We can assume that private consumption is falling into step as impulses from foreign trade are weakening,” said Jens Kramer, an economist at Nord LB in Hanover, Germany. “The economy is doing well. We won’t see an output slump.”

To contact the reporter on this story: Jana Randow in Frankfurt at jrandow@bloomberg.net.

To contact the editor responsible for this story: John Fraher at jfraher@bloomberg.net

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