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German business confidence rises on sunny outlook

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German businesses are feeling increasingly optimistic as the outlook brightens for Europe's biggest economy, a closely-watched barometer showed on Wednesday.

[FRANKFURT] German businesses are feeling increasingly optimistic as the outlook brightens for Europe's biggest economy, a closely-watched barometer showed on Wednesday.

The Ifo institute's business climate index rose by a full point to 107.7 points in May, comfortably outpacing analysts' expectations, Ifo said in a statement.

"The German economy is growing at a robust pace," said Ifo president Clemens Fuest.

"Companies are significantly more satisfied with their current business situation. In addition, they are noticeably more optimistic with regard to the coming months." Ifo calculates its headline index on the basis of companies' assessments of the current business environment and the outlook for the next six months.

The sub-index measuring current business increased by one point to 114.2 points and the outlook sub-index climbed by 1.1 point to 101.6 points, the institute said.

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The better-than-expected data reinforce the resilient picture of the German economy, which more than doubled its growth pace to 0.7 per cent in the first three months, according to final data released earlier this week.

The federal statistics office Destatis said that growth is being driven primarily by domestic demand, with record low employment, low inflation and rising wages boosting purchasing power and consumer spending.

According to the GfK market research group, consumer morale is also strong, with its household confidence index set to rise to 9.8 points in June from 9.7 points in May and consumers' willingness to spend rising from already high levels.

"Private consumption will remain an important pillar of the economy in the coming months," GfK wrote and said it was maintaining its forecast for private consumer spending to increae by around two percent in 2016, after 1.9 per cent last year.

Nevertheless, economists said the strong first-quarter growth look unlikely to be repeated in subsequent quarters this year.

"After a strong first quarter, the German economy should slow down somewhat in the current quarter," said ING DiBa economist Carsten Brzeski.

However, "today's Ifo index suggests that any technical slowdown could be very limited," said ING DiBa economist Carsten Brzeski.

"All in all, (the data) provide more comfort for optimists," the expert said.

But whether the improvement was the result of wishful thinking or fact-based optimism would remain to be seen, he added.

"One thing is for sure: the Ifo index confirms what earlier confidence indicators had suggested, that the worst nightmares of a global recession that spooked markets and economies in the first months of the year have clearly disappeared." Natixis economist Johannes Gareis said that "Overall, the Ifo survey report ... suggests that the German economy is on a positive growth track."

Nevertheless, "looking to the second quarter, we think the German economy won't repeat the blockbuster performance seen in the first quarter. We expect that quarterly GDP growth will remain stuck between 0.3-0.4 per cent for the remainder of this year. The implication is that in 2016 as a whole, Germany's real GDP should increase by 1.6 per cent," he said.

BayernLB economist Stefan Kipar said that German companies appear to be unfazed by the prospect of a possible exit from the EU by Britain.

Another confidence indicator, the ZEW investor confidence index, fell unexpectedly in May as uncertainty over a possible Brexit overshadowed strong growth data.

But UniCredit economist Andreas Rees also felt "there are obviously no Brexit fears among German manufacturing companies, although the UK is a heavy weight in terms of exports." Britain goes to the polls on June 23 to decide whether to remain in the European Union.


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