German Investor Confidence Increases to 2 1/2-Year High

German investor confidence increased to the highest in 2 1/2 years in January, adding to signs that Europe’s largest economy may gather momentum.

The ZEW Center for European Economic Research in Mannheim said its index of investor and analyst expectations, which aims to predict economic developments six months in advance, jumped to 31.5 from 6.9 in December. That’s the highest since May 2010 and the biggest gain in 11 months. Economists forecast an increase to 12, according to the median of 39 estimates in a Bloomberg News survey.

While Germany’s statistics office estimates the economy may have shrunk as much as 0.5 percent in the final quarter of 2012, the Bundesbank said yesterday there are indications that a recovery has already begun. Business confidence rose for a second month in December and the country’s service industries returned to growth. The European Central Bank predicts that the euro-area economy will exit its recession later this year.

“It gives reason for optimism,” said Jens Kramer, an economist at NordLB in Hanover, Germany. “We should see a considerable economic improvement toward mid-year with stronger momentum. The worst in the crisis seems to be behind us.”

The euro appreciated after the ZEW release and was up 0.4 percent at $1.3361 as of 12:18 p.m. in Frankfurt.

U.K. Recession

ZEW’s gauge of the current situation rose to 7.1 from 5.7 in December. Economists forecast a gain to 6.2, according to the median of 24 predictions in a Bloomberg News survey.

Other European economies are still struggling to regain strength. Britain’s budget shortfall excluding government support for banks widened to 15.4 billion pounds ($24.4 billion) in December from 14.8 billion pounds a year earlier, the Office for National Statistics in London said today. A U.K. factory index unexpectedly fell this month as export demand weakened, a separate report showed today.

Data on Jan. 25 will show U.K. gross domestic product fell 0.1 percent in the fourth quarter after the economy resumed expansion in the third, according to a Bloomberg News survey. Economists define a recession as two quarters of declining economic output and a contraction in the fourth and first quarters would be the third slump since GDP reached its peak before the financial crisis.

Bank of England Governor Mervyn King, who has said U.K. economic output is showing a “zig-zag pattern,” will deliver his first speech of 2013 to business executives in Belfast this evening.

‘Moderate Level’

For his part, ECB President Mario Draghi, who will hold a speech in Frankfurt tonight before attending the World Economic Forum in Davos later this week, has signaled confidence in the economic outlook. He said on Jan. 10 that while “persistent uncertainty” will continue to weigh on growth, the 17-member euro region should show a “gradual recovery” this year.

“The financial market experts seem to expect that the positive sentiment on the financial markets may soon result in companies realizing investments that had been postponed earlier on,” said ZEW President Wolfgang Franz in a statement. “However, the economic situation of important trade partners is rightly considered to be weak. This suggests that the German economy will further grow at a moderate level in 2013.”

German economic expansion slowed to 0.7 percent in 2012 from 3 percent in 2011, the Federal Statistics Office said last week. The Bundesbank based in Frankfurt predicts expansion of just 0.4 percent this year.

Marcus Kappler, an economist at ZEW, told reporters in Mannheim that “there’s a good chance” that the Bundesbank will revise up its economic estimate.

‘Marked Pickup’

“Today’s outcome supports our view that the worst for German growth has passed and a marked pickup looks likely,” Gizem Kara, an economist at BNP Paribas SA in London, said in an e-mailed note. “If the global economy picks up by more than we currently expect and euro-zone market stress eases further, this is likely to show up as higher export growth and confidence triggering a stronger rebound investment.”

Financial markets have rallied since the ECB pledged to do whatever needed to prevent a breakup of the euro area, easing concerns that the region’s sovereign debt crisis will continue to spread. Germany’s benchmark DAX share index has gained more than 20 percent since July 24.

German carmaker Volkswagen AG (VOW) said this month that 2012 deliveries rose 11 percent to 9.07 million vehicles. It “was the best sales year ever,” Chief Executive Officer Martin Winterkorn said.

Record Unemployment

Still, the currency bloc fell into its second recession in four years in the third quarter and the ECB expects the economy to shrink 0.3 percent this year. Unemployment in the euro region, which is destination for about 40 percent of German exports, reached a record 11.8 percent in November.

Continental AG (CON), Europe’s second-largest maker of auto parts, said last week that sales and profitability growth may slow in 2013 as demand within the region falters.

The Bank of Japan today made its strongest commitment yet to end two decades of stagnation, shifting to Federal Reserve- style open-ended asset purchases. Governor Masaaki Shirakawa and six of nine board members voted for a 2 percent inflation target, to be achieved “at the earliest possible” -- a pace not sustained in Japan since the early 1990s. The BOJ refrained from adding immediate stimulus.

The economic outlook for the euro area is “much more downbeat” than in Germany, said Ralph Solveen, an economist at Commerzbank AG in Frankfurt before the ZEW release. At the same time, “indicators should also gradually start to rise again” and “with the sovereign debt crisis ebbing, the most important brake on economic activity is being removed.”

To contact the reporter on this story: Stefan Riecher in Frankfurt at sriecher@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net

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