German Business Confidence Increases as Recovery on Track

German business confidence surged to the highest level in more than 1 1/2 years, signaling that the recovery in Europe’s largest economy remains on track even after growth slowed in the third quarter.

The Ifo institute’s business climate index, based on a survey of 7,000 executives, increased to 109.3 in November from 107.4 in October. That’s the highest since April last year and exceeds all 43 economist forecasts in a Bloomberg News survey. The median was for an increase to 107.7.

German companies are becoming more optimistic as they invest to take advantage of domestic unemployment near a two-decade low and the end of the euro area’s longest-ever recession. Investor confidence rose to the highest level in four years in November and the Bundesbank said this week that the nation’s economy remains on a “solid growth path.”

“Germany’s economic expansion is broad-based, with expectations rising across all sectors of the economy,” said Christian Schulz, senior economist at Berenberg in London. “Households generally should be in a fairly comfortable financial situation. And with the euro crisis not making the newspaper headlines much for the first time in at least two years, uncertainty should be lower as well.”

A measure of current conditions rose to 112.2 in November from 111.3, while a gauge of expectations jumped to 106.3 from 103.7, Ifo said.

The euro rose more than a quarter of a cent after the report and traded at $1.3514 at 11:45 a.m. Frankfurt time. The DAX stock index was little changed at 9,192.51.

Domestic Demand

German gross domestic product grew 0.3 percent in the third quarter after a 0.7 percent expansion in the three months through June. Growth was driven exclusively by domestic demand, the Federal Statistics Office in Wiesbaden said today. Capital investment rose 1.6 percent in the three months through September from the prior quarter and construction increased 2.4 percent, it said.

Beiersdorf AG, the Hamburg-based maker of Nivea hand cream, raised its full-year sales forecast this month and said its Tesa unit, which produces adhesive tapes for electronics and automotive industries, will report stronger annual sales growth than expected.

While the local economy contributed 0.7 percentage point to GDP last quarter, net trade subtracted 0.4 percentage point, signaling the fragility of the recovery in the 17-nation euro area, Germany’s biggest export destination.

Euro-Area Slowdown

Euro-area GDP grew 0.1 percent in the third quarter, down from 0.3 percent in the prior three months when the economy emerged from six quarters of recession. Italy extended a record-long contraction and the French economy, Germany’s biggest trading partner, unexpectedly shrank.

Italy and Spain will defend their 2014 spending plans at a meeting of euro-area finance ministers today, risking a clash over economic frailties that could undermine efforts to pull the currency bloc out of a debt crisis now in its fifth year.

Fabrizio Saccomanni of Italy and Luis de Guindos of Spain will be called upon to justify their draft budgets at the gathering in Brussels, amid fears that complacency is setting in following the easing of bond-market pressure over the past 18 months.

Coalition Talks

The European Central Bank this month reduced its benchmark interest rate to a record low of 0.25 percent, citing downside risks to the economy and the possibility of a prolonged period of low inflation. ECB President Mario Draghi said in Frankfurt today that while several countries are behind in implementing reforms, the economic situation in the currency bloc has improved.

Headwinds for Germany also include political uncertainty as the biggest parties try to form a coalition government. Chancellor Angela Merkel’s Christian Democratic bloc is still in talks with the Social Democrats two months after she won a general election. A group of economic advisers said last week that possible compromises, including a minimum wage and higher pensions, risk rolling back reforms that helped the economy.

Economists surveyed by Bloomberg News predict quarterly growth for Germany of 0.4 percent until the first three months of 2015. The European Commission forecasts the economy will expand 1.7 percent next year.

The Ifo index signals “a progressive improvement of the economy,” said Annalisa Piazza, an economist at Newedge Group in London. “Prospects for the future remained bright in November.”