German Business Sentiment Hits New High - Update
DOW JONES & COMPANY, INC. 7:34 AM ET 4/24/2015
FRANKFURT--Confidence among German companies improved in April to its highest level in nearly a year, a closely watched business survey showed, extending a strong start to 2015 for Europe's biggest economy.
Still, a drop in expectations for future business raised doubts about the durability of Germany's upswing and whether Europe's economic locomotive will generate enough momentum to boost its languishing neighbors, such as France and Italy.
Germany's Ifo think tank said Friday its business climate index rose to 108.6 in April from 107.9 in March, hitting its highest level since June 2014. Economists in a Wall Street Journal poll had expected the indicator to rise to 108.4.
The roughly 7,000 companies polled by Ifo were more upbeat about their current business situation, but scaled back their expectations for the next six months for the first time since October.
The Ifo index continues to point to stronger growth in 2015 than much of last year, but evidence is building that the upside is limited.
"The overall message from the Ifo is positive, even if it raises a question about the momentum of growth," just as the latest survey of German purchasing managers did, said J.P. Morgan economist Greg Fuzesi.
A less rosy outlook may disappoint those who had hoped that the upswing in Germany--which makes up about 30% of the eurozone's gross domestic product--will be sturdy enough to carry the entire 19-member eurozone. Germany's GDP expanded strongly in 2010 and 2011, but that failed to provide a lasting lift to the eurozone as France and Italy floundered.
The German government this week raised its 2015 growth forecast to 1.8% from 1.6% previously, while some private sector economists say the rate could top 2%. That would be below growth rates expected for the U.S., the U.K. and many emerging markets.
Optimism has been driven by Germany's buoyant consumers taking heart from low unemployment and rising wages. Producers, meanwhile, have been getting a leg up from lower oil prices and a weaker euro, which makes their goods more competitive abroad.
But without the positive effects stemming from oil and the exchange rate, growth would be much lower this year. In fact, German GDP would grow by just above 1%, according to Deutsche Bank's chief German economist, Stefan Schneider.
Analysts are also increasingly weighing the effects of lower demand from emerging markets on Germany's export- dependent industry, as well as the impact of wage growth on corporate profit margins and investment.
The concern is that cooling emerging market demand won't be compensated for by rising orders from the U.S. and Europe, especially as many German businesses are still hesitant to upgrade their aging machinery and equipment.
Spare capacity is still high in many companies, according to the VDMA engineering federation, which represents more than 3,000 Mittelstand companies.
"Roughly 30% of mechanical engineering firms say that they could produce more if orders were to increase," said VDMA economist Olaf Wortmann.
German exports to Russia slumped 18.1% last year amid sanctions imposed on Russia over its annexation of the Crimea. Exports to Russia--among Germany's biggest trading partners--were down 32.6% in February from the year earlier period.
"Doing business with Russia has not just been difficult, it has broken down entirely in some segments," said VDMA's chief economist Ralph Wiechers.
Germany's influential automotive association VDA has cautioned that car market growth in China, the world's biggest auto market, could drop to as low as 6% this year from 12.7% in 2014.
Ian Robertson, BMW board member in charge of global sales, said at Shanghai international auto show: "We still see growth (in China), though at a lower level."
Weaker overseas demand may be offset by stronger consumer spending at home. German unions have achieved healthy wage gains far outpacing inflation in recent months, boosting household incomes. The government has also recently introduced a minimum wage of 8.50 euros ($9.20) an hour. While they provide a near-term boost, these wage trends could eat into corporate profit margins and eventually weaken Germany's competitive position globally.
"In two of the past three years, unit labor costs in Germany have risen at a sharper rate than" companies' ability to raise prices, said Commerzbank economist Ralph Solveen.
Solid business activity in Germany at the start of the year appears to be having a positive effect on one of its immediate neighbors. Producer confidence in the Netherlands, Germany's second-biggest trading partner, hit a four-month high in April.
Write to Nina Adam at nina.adam@wsj.com
(END) Dow Jones Newswires
04-24-150734ET
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