German climate improves

August 22, 2001 Posted: 1033 GMT

LONDON (CNN) -- German business leaders unexpectedly reported an upturn in confidence in July, but experts warned it's too soon to hail an economic revival.

The business climate index complied by Germany's Ifo research institute rose to 89.8 in July from a five-year low of 89.5 set the previous month. The index is a widely watched monthly guide to business sentiment.

The consensus forecast among economists polled by Reuters was for a decline in the index to 88.6. Even the most optimistic prediction was for a drop to 89.0.

It was the first rise in the Ifo number since January, but economists said the explanation might have been partly that respondents had hopes of a cut in euro interest rates – whereas the European Central bank in fact kept rates unchanged at the start of August.

The prospect of a weak euro may also have boosted confidence because it would have improved the climate for exporters. However the euro has strengthened against the dollar in recent weeks.

"From the export side there may have been a bit of stabilisation coming in," Hans Redeker, an economist at BNP Paribas, told CNN.

"But again if the hope on the export market is based on currency expectations ... that could mean that with the next Ifo release the whole thing is going to be reversed."

Euro rises further

The euro rose against the U.S. dollar to a five-month high of 92.39 U.S. cents on Wednesday after the Ifo survey was released. The euro had been trading close to 91.37 cents before the announcement.

The business-expectations component of the Ifo index rose to 95.0 from 93.5, while the sub-index that tracks firms' assessment of current conditions slipped to 84.8 from 85.4. The numbers are based on a monthly survey of around 7,000 German firms.

The Ifo institute has said in the past it would take at least three straight months of gains in the index to convincingly signal a rebound in the economy.

Forthcoming German statistics are expected to show that economic growth has slowed to a standstill. Thousands of layoffs at companies like chip maker Infineon Technologies and chemicals company BASF are swelling the jobless lines, and the construction sector may well add more than 100,000 as winter approaches. Layoffs are expected to depress already weak consumer demand.

Any further improvement in German business confidence may well depend on the actions of the European Central Bank, which has trimmed rates this year to 4.5 percent in a surprise move.

The U.S. Federal Reserve on Tuesday cut rates for the seventh time this year, bringing the federal funds rate to 3.5 percent, while the Bank of England has cut four times in 2001 in an effort to stimulate growth.

"We hopefully expect the ECB to cut rates by 25 basis points on August 30," said Neville Hall, an economist at Credit Suisse First Boston.

"They seem to acknowledge that growth has weakened in their monthly bulletin and as a consequence we think that [a cut] is pretty likely. And then they can embark on a path of sustained monetary easing through the end of this year and into the beginning of next."

German Chancellor Gerhard Schroeder may be banking on the ECB to serve up lower rates to give him a better chance of meeting a key election promise. When elected he promised to cut German unemployment to 3.5 million by next year when elections come round again.

Economists currently fear unemployment could be above 4 million in January.

--CNN's TOM BOGDANOWICZ contributed to this report

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