German Business Confidence Unexpectedly Gains on Outlook

German business confidence unexpectedly climbed to the strongest level in 2 1/2 years in a sign that growth in Europe’s largest economy may accelerate.

The Ifo institute’s business climate index, based on a survey of 7,000 executives, advanced to 111.3 in February from 110.6 in January. That’s the fourth monthly gain and the strongest reading since July 2011. Economists predicted a decline to 110.5, according to the median of 41 estimates in a Bloomberg News survey.

Germany is key to supporting the fragile recovery in the rest of the 18-nation euro area, its biggest trading partner. European Central Bank President Mario Draghi said on Feb. 6 that policy makers must examine the region’s economic data before deciding whether further action is needed to provide stimulus. Signals since then have ranged from better-than-expected growth to slowing manufacturing.

“Germany’s economy is going strong this winter,” said Christian Schulz, senior economist at Berenberg Bank in London. “Germany can rely on domestic demand as the key driver of growth at the current stage of the cycle. Private investment is rebounding after a long period of decline when the euro crisis undermined confidence.”

A measure of current conditions rose to 114.4 in February from 112.4 the prior month, Ifo said. A gauge of expectations dropped to 108.3 from 108.9.

Euro Gain

The euro gained almost a quarter of a cent after the report and was at $1.3759 at 11:06 a.m. Frankfurt time. The DAX index of German stocks was down 0.3 percent at 9,629.

German gross domestic product increased 0.4 percent last quarter, exceeding analysts’ estimates, as net exports rose and investment in equipment and construction picked up. GDP in the euro area climbed 0.3 percent, also more than forecast, bolstered by stronger-than-expected expansions in France and the Netherlands and a return to growth in Italy.

Wolfsburg, Germany-based Volkswagen AG led a fifth monthly gain in European car sales in January as the region’s registrations advanced 5.2 percent from a year earlier. German sales climbed 7.2 percent.

Even so, the ZEW index of German investor confidence fell for a second month in February after reaching a seven-year high in December. Manufacturing in Germany and the euro area probably slowed, according to surveys of purchasing managers by London-based Markit Economics.

Price Risks

Subdued price pressures pose a risk to the currency bloc’s economy by threatening to curb business activity. Euro-area inflation was 0.8 percent in January, final data by the European Union’s statistics office in Luxembourg showed today. While that’s higher than the initial estimate of 0.7 percent, it’s still well below the ECB’s goal of just under 2 percent.

Inflation probably slowed to 0.7 percent this month, matching a four-year low in October, according to a Bloomberg survey before figures are published on Feb. 28.

The ECB next meets to set rates on March 6. Draghi said yesterday at the Group of 20 meeting of finance ministers and central-bank heads in Sydney that he’ll have “the full set of information needed for deciding whether to act or not” by then.

Today’s Ifo report “confirms that Germany remains the main engine of the euro zone,” said Annalisa Piazza, senior fixed-income strategist at Newedge Group in London. Divergences with other countries in the bloc “remain extremely elevated,” she said.

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