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German business confidence rises

A closely watched report on the business sentiment in Germany, Europe’s biggest economy, rose slightly in January, beating expectations and suggesting to some that fallout from the US mortgage crisis may be less severe than thought in Europe.

Munich’s Ifo institute said Thursday its business climate index rose to 103.4 in January, up from 103 in December and above the 102.2 forecast by analysts polled by Dow Jones Newswires. “On the whole, the condition of firms in the German industry and trade continues to be robust,” said IFO president Hans-Werner Sinn. The 7,000 manufacturing firms surveyed by Ifo assessed current conditions as slightly less positive than in December, with the index easing to 107.9 from 108.1 in December. However, the measure of expectations rose slightly to 99.0 from 98.2. “Confidence in the six-month outlook has increased slightly, and the survey participants are nearly just as optimistic with regard to future export business as in December,” Sinn said. “The share of firms that plan to hire additional staff has fallen somewhat, however.” The Ifo report comes after December’s ZEW institute showed an end to a 10-month slide in economic expectations, though worries remain. The ZEW index fell to minus 19.0 from minus 28.5 the month before, with any reading below zero reflecting pessimism about the economic outlook.

The Ifo report, however, indicates that the fallout of the US subprime crisis for Germany will be “much less severe than suggested by the recent sharp stock market declines,” said Timo Klein a senior economist for Germany with Global Insight. “January Ifo data suggests that the recent collapse of equity market valuations overstates the risk of banking sector problems for the nonfinancial private sector,” he said, noting, however, that the Ifo survey was conducted before this week’s world stock market volatility. With consumer demand expected to turn into “the main pillar for growth,” Klein said the European Central Bank should hold off on further interest rate hikes and eventually cut rates. “An interest rate cut -- certainly no later than in mid-2008 -- will be its next move as inflation pressure recedes along with growth momentum in coming months.” (Businessweek)