German economic data bring sparkle to eurozone gloom

Two leading sentiment indicators in Germany surprised on the bright side here on Tuesday, bringing a rare touch of Christmas sparkle to the pall of gloom hanging over the eurozone. The Ifo economic institute said it was bringing "good tidings" with the announcement that its closely watched business sentiment index defied analysts' expectations for the second month in a row and rose to 107.2 points in December from 106.6 in November. Analysts had been projecting a fall in the index to about 106 points. However, companies "continue to view their current business situation as favourable. Business expectations have improved for the second month in a row," said Ifo president Hans-Werner Sinn. "The German economy appears to be successfully defying the downturn in western Europe. These are good tidings for Christmas," Sinn said. The Ifo data were not the only piece of good news to come out of Germany on Tuesday. Earlier, a separate survey showed that consumer confidence is also holding up in the face of the eurozone debt crisis as rising employment and incomes helped to offset looming recession fears. GfK released its latest index of household confidence, with the barometer forecast to remain steady at 5.6 points in January, unchanged from December. "There can be no talk of a crash as in 2008," said Ifo chief Sinn. "Rather, stabilisation tendencies are beginning to emerge. In fact, companies are more positive about their outlook for the next six months and the opportunities for export business are also looking better." Sentiment in the retail sector in particular had improved sharply, "pointing to good Christmas sales," Ifo said. Ifo calculates its headline index on the basis of companies' assessments of their current business and the outlook for the next six months. The sub-index measuring current business held steady at a high 116.7 points and the outlook sub-index rose to 98.4 points, their highest level since August. Christian Schulz, senior economist at Berenberg Bank said that following other leading indicators, such as the ZEW investor sentiment index last week, the Ifo data offer further "evidence of a stabilisation." "In combination with resilient consumer confidence, it emerges that German domestic demand remains strong on the back of good economic fundamentals," Schulz said. Unemployment remained very low, oil prices had stabilised and real incomes were rising, he said. "Private consumption and construction investment may cushion the economic downturn triggered by the euro crisis. As long as the crisis does not deteriorate, Germany may only see mild contraction in the winter," Schulz said. UniCredit economist Alexander Koch noted that business climate in manufacturing was stagnating as global economic weakness and the adverse situation in a number of eurozone countries was weighing on industrial demand. Nevertheless, the German domestic economy was "in good shape," Koch said. "And our baseline scenario for a temporary and limited correction in foreign demand would not leave deep scars." Postbank analyst Heinrich Bayer said the surprise up-tick in the Ifo index "can no longer be seen simply as a one-off. It may actually mark a turnaround." The fallout from the crisis "will not be as bad as feared," Bayer said. "The German economy will scrape past recession this winter but the expansionary forces will gain the upperhand again in the spring." Jonathan Loynes, chief European economist at Capital Economics, was more cautious. "Overall, there is some encouragement here that the German economy is not currently plunging into recession, but the picture is one of very weak growth at best and could well deteriorate again," he said. "Against that background, market doubts over Germany's continued status as a safe-haven from the problems in the euro-zone's periphery may well re-surface over the coming weeks and months," Loynes warned.