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German business optimism probably fell on slower growth outlook

German business confidence probably declined for a second month in February on signs economic growth will slow from the fastest pace in six years, a survey of economists shows.

The Ifo institute's sentiment index, based on responses from 7,000 executives, may have declined to 107.5 from 107.9 in January, according to the median of 41 estimates in a Bloomberg News survey. The index reached 108.7 in December, the highest since records for reunified Germany began in 1990. Munich-based Ifo will release the report on February 23. The euro's 10% appreciation against the dollar in the past year may erode German export growth, which last year drove the fastest expansion since 2000. An increase in sales tax on January 1 and higher European Central Bank interest rates also threaten to reduce consumer spending. „We expect abundant optimism to recede a bit in February, but that's not a cause for concern,” said Joerg Kraemer, chief economist at Commerzbank AG in Frankfurt. „Germany will have a respectable growth rate this year, though not quite at the level of 2006, which with hindsight must be called a boom year.” Growth in Germany, Europe's largest economy, unexpectedly accelerated in the Q4. The DIHK chamber of industry and trade last week raised its forecast for this year to 2.3% from 1.5%. That's still a slowdown from last year's 2.7% pace. Manufacturing growth slowed in January and retail sales slumped after the government raised the value-added tax, a sales levy, to 19% from 16%, industry surveys showed.

Henkel KGaA, the German maker of Persil detergent and Right Guard deodorant, expects slower revenue growth this year, partly because the VAT increase reduces purchasing power. At the same time, the euro's gain is making German goods more expensive abroad. Export growth may slow to 7.9% this year from 13.7% in 2006, the government said January 31. „We've seen the peak in growth,” said Kenneth Broux, an economist at Lloyds TSB Corporate Markets in London. „But the bias is to the upside. Consumer spending could get a positive impulse from the decline in unemployment.” The jobless rate fell to 9.5% in January, a five-year low, and oil prices are down 25% from a record $78.40 a barrel in July. German investor confidence rose this month after the benchmark stock index reached a six-year high. Italian business confidence may have risen in January, while French business optimism probably was unchanged, separate surveys of economists show. Those reports are due on February 22. The European Commission last week raised its forecast for euro-region economic growth this year to 2.4% from 2.1%, citing the improving labor market. The economy expanded 2.7% in 2006. The pace of growth may prompt the ECB to keep raising borrowing costs to contain inflation. The Frankfurt-based central bank has already signaled it will raise its benchmark interest rate to 3.75% from 3.5% in March, the seventh increase since late 2005. Investors expect another increase to 4% by September, futures trading shows. (Bloomberg)