German investor confidence rose to the highest in eight months in March as evidence mounted Europe's largest economy will overcome an increase in sales tax and a slowdown in the US.
The ZEW Center for European Economic Research index of investor and analyst expectations rose to 5.8 from 2.9 in February. That's the highest since July. Economists expected an increase to 3.2, according to the median of 40 forecasts in a Bloomberg News survey. Germany's economy may regain momentum as companies increase hiring and investment, helping consumers cope with Chancellor Angela Merkel's decision to raise the so-called value added tax in January.
The Kiel-based IfW research institute yesterday forecast the economy will expand 2.8% this year, the best performance since 2000. „Overall, the news coming from Germany is really positive,” said Sandra Petcov, an economist at Lehman Brothers International in London. „The impact of VAT has been a lot smaller than many would have anticipated, corporate Germany is doing well and while the US may slow down, it's not a meltdown.” ZEW started its survey on Feb. 26, the day before a five-day stock-market rout that wiped $3.3 trillion from the value of global equities. The deadline for responses was yesterday. Germany's DAX Index, which slumped 7% in the sell-off, has risen almost 3% since March 5.
The euro rose to $1.3178 at 11:19 a.m. in Frankfurt from $1.3160 before the report was published. The yield on the benchmark two-year note, which is the most sensitive to interest-rate expectations, fell 2 basis points to 3.92%. The gauge measuring current conditions fell less than economists expected to 69.2 from 70.9.
The IfW institute, one of five that advises the German government, said yesterday exports and investment will drive the economy this year and help growth exceed last year's 2.7% rate, the fastest since the start of the decade. Industrial production and exports beat economists' forecasts in January and the unemployment rate dropped to the lowest in more than five years in February.
„German companies are continuing to invest, which means they will expand and hire more people,” said Dominic White, an economist at ABN Amro Holding NV in London. „The German recovery as a whole is still pretty sound.”
Merkel's tax increase may hold back growth in the first quarter. Retail sales fell 5.1% in January from December and new car sales slumped 13% in the first two months of the year. Slower growth in the US is also clouding the outlook for Germany's exporters, the mainstay of the economy in the past decade. Former Federal Reserve Chairman Alan Greenspan said March 5 there's a „one-third probability” of a US recession this year.
Concern economic growth is slowing was among reasons for this month's slide in global share prices. Growth outside the US may help shore up Germany's economy. European Central Bank President Jean-Claude Trichet said in Basel, Switzerland yesterday that global demand „continues to be dynamic.” Porsche AG, the maker of the 911 Carrera sports car, said March 5 that Asia and eastern Europe are offsetting a „difficult” market in North America.
With economic growth giving companies more room to raise prices and spurring workers to demand more pay, the ECB may raise interest rates further to quell inflation. The Frankfurt-based central bank has increased its benchmark rate seven times since the end of 2005. Investors expect the bank to raise the rate to 4% from 3.75 in September, futures trading shows.
The implied rate on the three-month Euribor futures contract for September was 4.10% today, up from 4% a week earlier. The contracts settle to the three-month inter-bank offered rate for the euro, which has averaged 16 basis points more than the ECB's key rate since the single currency's start in 1999.
„The ECB council still sees medium- to long-term upside price risks to the projections in its base scenario,” said ECB council member Axel Weber in Cologne, Germany on March 9. ZEW says its survey findings anticipate the Ifo institute's business sentiment indicator, Germany's most-watched confidence gauge. Munich-based Ifo is scheduled to release this month's index on March 27. (Bloomberg)