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German Business Confidence Jumps to Two-Year High

A Lamborghini Gallardo LP 570-4 Superleggera automobile
An employee cleans a Lamborghini Gallardo LP 570-4 Superleggera automobile at the Volkswagen AG (VW) annual shareholders' meeting in Hamburg, on April 22, 2010. Photographer: Michele Tantussi/Bloomberg

German business confidence rose more than economists forecast to a two-year high in April as the global economic recovery boosted export demand and warmer weather allowed workers back onto construction sites.

The Ifo institute in Munich said its business climate index, based on a survey of 7,000 executives, jumped to 101.6 from 98.2 in March. That’s the highest reading since May 2008. Economists expected a gain to 98.7, according to the median of 37 forecasts in a Bloomberg News survey.

The International Monetary Fund this week raised its forecast for global growth in 2010 to 4.2 percent from 3.9 percent, saying the recovery has “evolved better than expected.” That’s helping Germany shrug off a Greek budget crisis that’s undermining confidence in the 16-nation euro area and the impact of Iceland’s volcanic eruption, which brought European air traffic to a standstill last week.

“German businesses seem to be untouched by these downbeat scenarios,” said Carsten Brzeski, senior economist at ING Group in Brussels. “If the real economy now follows up on confidence indicators’ promise, the near future looks very bright.”

The euro rose after the Ifo report and traded at $1.3335 at 11 a.m. in Frankfurt, up from 1.3230 this morning.

Ifo’s gauge of the current situation increased to 99.3 from 94.5, while an index of executives’ expectations rose to 104 from 102.

Strong Tailwinds

The German economy, Europe’s largest, resumed expansion in the second quarter after the coldest winter in 14 years probably saw it contract in the first, the Bundesbank said on April 19.

The euro’s 12 percent decline in the past five months is making exports more competitive outside the currency bloc. German manufacturing is expanding at a record pace and the arrival of spring is buoying building activity and consumer spending.

The government forecasts growth of 1.4 percent this year and 1.6 percent in 2011. The economy shrank 5 percent in 2009, the most since World War II.

“At the moment, tailwinds for the German economy are very strong,” said Alexander Koch, an economist at UniCredit MIB in Munich. “After the recovery took a breather in the first quarter, we’ll see a powerful rebound in spring.”

Volcanic Ash

The recovery could be interrupted by ash spewing across Europe from Iceland’s Eyjafjallajökull volcano. The ash cloud forced the cancellation of more than 95,000 flights between April 15 and April 21, disrupting conferences, forcing carmakers to cut production and curbing shipments of fresh foods.

“In the worst-case scenario, in which the volcanic risk bubbles on, intermittently shutting down North European air space through the rest of the year, there would almost certainly be no economic recovery in Europe in 2010,” Vanessa Rossi and Will Jackson, research fellows in the international economics program at London-based Chatham House, wrote in a report published yesterday. “Given already poor expectations for European growth this year, a relapse into a prolonged recession would not be ruled out.”

The recovery may also prove sluggish as companies struggle to shake off the impact of last year’s recession. The IMF cut its forecasts for German growth this year to 1.2 percent from 1.5 percent.

Not China

“Germany’s export engine is running again but it won’t be as fast and profitable as in the past,” said Sylvain Broyer, chief euro-region economist at Natixis in Frankfurt. “Germany may do better than most of the euro-area countries in the next two years. But Germany is still Germany. It doesn’t have China’s growth perspectives.”

Still, Volkswagen AG, Europe’s largest automaker, said this week that first-quarter profit almost doubled as sales in China and at its Audi luxury brand jumped to records.

Daimler AG, the world’s second-biggest maker of luxury cars, this week raised profit forecasts for its Mercedes-Benz and truck units after reporting better-than-expected earnings for the three months through March.

A measure of German manufacturing growth by Markit Economics this month rose to the highest level since the index was created in 1996. German investor confidence also surged in April as falling unemployment and the weaker euro improved economic prospects.

The single European currency’s decline is partly due to Greece’s fiscal crisis, which has fueled speculation the country could default on its debts or even leave the euro region. The euro fell below $1.33 yesterday after Moody’s Investors Service cut Greece’s credit rating.

“At least for exporters a weak euro is definitely good for the moment,” said Kai Carstensen, an economist at Ifo in Munich. “In East Asia we see a strong increase in export demand for German goods and clearly it helps here a lot.”

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