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German Business Confidence Unexpectedly Increases

Traders work in front of the DAX index curve
Germany’s benchmark DAX stock index has gained more than 10 percent this year. Photographer: Hannelore Foerster/Bloomberg

German business confidence unexpectedly climbed in October to the highest level in three and a half years, suggesting growth may not slow as much as some economists forecast.

The Munich-based Ifo institute said its business climate index, based on a survey of 7,000 executives, rose to 107.6 from 106.8 in September. That’s the highest since May 2007. Economists had expected a drop to 106.5, according to the median of 38 forecasts in Bloomberg News survey.

Surging exports helped Germany’s economy expand 2.2 percent in the second quarter, the fastest pace in two decades. While foreign demand for German goods may wane as the global recovery stutters, falling unemployment is boosting consumer confidence and spending at home. The government yesterday more than doubled its 2010 growth forecast to 3.4 percent.

Today’s Ifo report “suggests that the euro zone’s largest economy is defying the global gloom,” said Jennifer McKeown, an economist at Capital Economics Ltd. in London. “Germany will continue to outperform for now, but it won’t be long before exports slow sharply.”

The euro initially rose after the Ifo report before giving up its gains. It traded little changed at $1.3913 at 12:10 p.m. in Frankfurt.

Ifo’s measure of executives’ expectations climbed to 105.1 from 103.9. The gauge of current conditions advanced to 110.2, the highest since March 2008, from 109.8.

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German factory orders increased almost four times as much as economists forecast in August, unemployment fell for a 15th month in September and consumer confidence climbed to a three-year high in October.

“The German boom is much broader than just exports,” said Simon Junker, an economist at Commerzbank AG in Frankfurt. “Investment goods are also in demand domestically. It’ll be a good year for profits.”

BASF SE, the world’s biggest chemical maker, this week raised its profit goal for 2010 after third-quarter earnings surged.

Germany’s benchmark DAX stock index has gained more than 10 percent this year, compared with a decline of 3 percent in the Euro Stoxx 50 gauge of euro-area equities. At the same time, investor confidence fell to a 21-month low this month.

European Weakness

Europe’s services and manufacturing industries expanded at the weakest pace in a year in October, suggesting a global slowdown is starting to undermine the region’s economies, Germany’s biggest export market. Belt-tightening across the 16-nation euro area, as governments try to rein in budget deficits, may also crimp demand.

The euro has climbed 17 percent against the dollar since June 7, making German exports more expensive outside the currency bloc. Group of 20 finance chiefs meet in Gyeongju, South Korea, today amid concern some countries are pursuing weaker exchange rates to bolster their economies.

German economic growth slowed in the third quarter from the second, the Finance Ministry said yesterday.

“The economic outlook is still fairly good,” said David Milleker, chief economist at Union Investment in Frankfurt. “However, unless domestic demand really kicks in, the German economy is like a boat without a keel. If it faces a strong headwind from the world economy, it could capsize.”

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