German business sentiment hit its strongest in 3-1/2 years in October and firms' expectations also improved, with a key survey today suggesting that a recovery in Europe's largest economy may hold up better than expected.
The Munich-based Ifo think tank's business climate index, which points to growth levels six months ahead, climbed to 107.6 from 106.8 in September. That was its fifth increase in a row and the highest since May 2007.
The mid-range forecast in a Reuters poll of 44 economists had been for a slight fall to 106.5.
The Ifo survey is one of Europe's most influential monthly numbers for financial markets and the surprise rise helped push up the euro briefly against the dollar and pressured December Bund futures
"Firms have once again given more positive assessments of their current business situation and their business expectations have improved," Ifo said in a statement. "The engine of economic activity is running smoothly."
An Ifo index for business expectations also rose unexpectedly to 105.1 from 103.9, pointing to further strong growth and confounding expectations that a gloomy outlook for Germany's trade partners would send the economy into a sharp slowdown.
Analysts say the strong figures highlight the risk of Germany leaving its peers behind in the upswing, with some saying it is now growing at least twice as fast as the overall euro zone economy.
Earlier this week closely-watched purchasing managers' surveys suggested recovery momentum in the wider euro zone was fading, despite the stellar performance by its biggest economy.
A healthy labour market and improving consumer confidence mean German domestic demand is picking up and Economy Minister Rainer Bruederle said yesterday that domestic demand would make up three quarters of growth in 2011.
He also more than doubled the government's 2010 growth expectations to 3.4 per cent this year and predicted growth would slow to a still firm 1.8 per cent next year.
"This (Ifo) is a super figure. It shows that the economy continues to grow strongly. Not only were the conditions improved but also the expectations continued to rise further," said Ralph Solveen of Commerzbank.
"I would never bet against Ifo. Ifo has turned out to be accurate most often. But that doesn't mean we'll have a permanent boom."
Germany's private sector also grew faster than expected in October, with both services and manufacturing gaining.
Signs from the corporate sector have also been bullish, with global chemicals maker BASF predicting better than expected gains in 2010 operating profit by at least two thirds after a strong quarter, though it stopped short of forecasting the same pace of growth next year.
Germany's bluechip Dax index climbed above 6,600 points this week for the first time since August 2008, but still has some way to go regain pre-crisis levels around 8,000 points.
Surging exports have helped Germany emerge quickly from its deepest post-war slump last year, boosting growth to 2.2 per cent in the second quarter, the highest in reunified Germany.
However, the euro has gained almost a fifth since a June low, making German exports more expensive outside the currency area.
Ifo also pointed to currency tensions threatening the world economy and Ifo economist Klaus Abberger said an unpleasantly quick appreciation of the euro was problematic for German firms.
Speaking as Group of 20 finance and central bank chiefs meet in South Korea to seek an agreement on a common path to manage currency, trade and economic imbalances, he also said the Chinese yuan should appreciate.
Reuters