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Bloomberg: German Investor Confidence Rises to a Six-Month High

January 16, 2007 | Bloomberg

German investor confidence rose more than forecast to a six-month high in January as Europe's biggest economy overcomes a higher sales tax and a slowdown in export markets.

The ZEW Center for European Economic Research index of investor and analyst expectations for economic growth in six months rose to minus 3.6 from minus 19 in December. Economists forecast a gain to minus 10, according to the median forecast of 43 economists in a Bloomberg survey.

Today's report adds to signs that cooling growth in the German economy may be limited even after Chancellor Angela Merkel on Jan. 1 raised value-added tax, a sales levy, to 19 percent from 16 percent. Germany's DAX stock index is close to a six-year high, unemployment last month fell the most since reunification in 1990 and business optimism surged.

``The German corporate sector is still in a very good condition,'' said Sandra Petcov, an economist at Lehman Brothers in London, who forecast minus 4. ``VAT distortions may not have been as large as feared and the global backdrop looks more positive. Sentiment is likely to remain at robust levels.''

The confidence indicator has shown a negative reading, with pessimists outnumbering optimists, in every month since August. A gauge measuring investors' current expectations increased to 70.6 from 63.5 in December. Economists forecast a gain to 61.

Euro Rises

The euro rose as much as 0.4 percent to $1.2980 after the release and traded 0.3 percent higher at 12:59 p.m. in Frankfurt. The benchmark DAX Index was little changed at 6726.88 points and the Dow Jones STOXX 50 Index, which measures the performance of Europe's 50 largest companies, slipped 0.1 percent to 3786.41.

ZEW says its survey findings anticipate the outcome of the Ifo institute's business sentiment indicator, Germany's most- watched confidence gauge. Munich-based Ifo is scheduled to release the January confidence indicator on Jan. 25.

German economic growth accelerated last year to 2.5 percent, from 0.9 percent in 2005, the Federal Statistics Office said Jan. 11. In comparison, the euro-region probably expanded about 2.7 percent in 2006, according to European Central Bank estimates.

In 2007, the German economy may expand 1.4 percent, the International Monetary Fund forecast on Dec. 14, raising a previous estimate of 1.3 percent.

Factory Orders

So far, the German economy is showing few signs of cooling. Factory orders rose in November and the trade surplus surged to a record. The jobless rate fell to 9.8 percent last month, the lowest since August 2002, from 10.1 percent. Business confidence in December jumped to the highest level since 1990.

DaimlerChrysler AG, the world's largest truckmaker based in Stuttgart, Germany, said today sales of its heavy trucks reached a record last year on increasing demand. Continental AG, the world's fourth-largest tiremaker, said Dec. 28 it expects to hire more workers and to increase investment in 2007 on increasing earnings.

The DAX, which measures the performance of Germany's 30 largest publicly traded companies, has gained about 8.7 percent over the last three months, making it the best performer among major European equity markets in that period.

The U.S. may be the biggest drag on global growth. The world's largest economy, which buys one-fifth of European exports, grew at the weakest pace in a year in the third quarter.

At the same time, the euro's 6.7 percent gain against the dollar over the past year is making the 13-nation region's exports less competitive. Slovenia adopted the currency on Jan. 1.

U.S. Slowdown

SAP AG, the world's largest business-management software company, on Jan. 12 reported a smaller gain in fourth-quarter revenue from software licenses than analysts expected. Suedzucker AG, the world's biggest sugar processor, on Jan. 11 cut its full- year profit forecast on lower prices.

``There's still uncertainty about a U.S. slowdown,'' said Sandra Schmidt, an economist at ZEW. ``We expect U.S. orders to weaken but companies' order situation will remain positive overall.''

The German economy may not be able to rely on stronger consumer demand with a higher VAT draining purchasing power. A gauge measuring retailers' expectations for sales this month dropped to the lowest in a year, the Bloomberg purchasing managers index showed on Jan. 5.

Consumers and companies may also have to grapple with higher borrowing costs in coming months. ECB President Jean-Claude Trichet said Jan. 11 that he would say ``nothing here that would change the expectation by markets'' for the first quarter.

``At the moment, monetary policy is still accommodative,'' ZEW economist Matthias Koehler said at a briefing in Mannheim, Germany, today. ``Interest rates are low, there is plenty of liquidity and the euro-area economies are in good shape.''

Futures trading shows investors expect a quarter-point increase in March from a current 3.5 percent and trimmed bets on a further rise in the second half. The yield on March futures contracts for the month was at 3.92 percent today. The yield on September futures was at 4.14 percent.

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 benchmark rate since the currency's start in 1999.


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