Greece, Ukraine weigh on German business sentiment

CONCERNS about Greece and Ukraine are weighing on German business confidence, data showed on Monday, but analysts say not enough to derail recovery in Europe’s biggest economy.

The Ifo institute said in a statement that its closely watched business climate index inched only fractionally higher to 106.8 this month from 106.7 points in January, falling short of analysts’ expectations for a more robust increase.

The reason for the disappointing reading was a drop in companies’ assessment of current business, said Ifo president Hans-Werner Sinn.

Companies’ “satisfaction with the current business situation decreased somewhat, but companies expressed greater confidence in future business developments,” Sinn said. 

Ifo calculates its headline index on the basis of companies’ assessments of current business and the outlook for the next six months.

The sub-index measuring current business slipped to 111.3 points from 111.7 points, while the outlook sub-index increased by 0.5 point to 102.5 points, the institute said.

 Analysts however saw no cause for concern about the Ifo data, given the recent strong economic numbers coming from Germany.

“Despite the drop, the current-conditions component is at a comfortable level and does not show any signs yet that Germany’s growth engine could soon start to sputter,” said Natixis economist Johannes Gareis.

The rise in business expectations was fairly widespread across sectors, he noted.

“This signals that the current macroeconomic environment — of the European Central Bank’s aggressive monetary policy response, a low euro exchange rate and low oil prices and thus low inflation — benefits not only the export-dependent manufacturing sector but also the domestic-oriented services sector,” Gareis said.

“All in all, and despite the smaller-than-expected increase, today’s Ifo business climate index adds to the mounting evidence that Germany’s macro outlook is improving, strengthening the case for optimism,” Gareis said.

Earlier this month, the federal statistics office calculated that German gross domestic product (GDP) expanded by 0.7 percent in the fourth quarter of last year, powered by robust consumer spending. 

BayernLB economist Johannes Mayr attributed the disappointing Ifo reading to increased political uncertainty in face of the Ukraine conflict and Greece’s debt problems. 

“But overall, there is no reason to doubt the positive outlook for the German economy,” he said. “The economy should regain momentum in the coming months.” 

Berenberg Bank economist Christian Schulz also believed the Greek and Russian geopolitical risks were “probably preventing a more robust upturn” in business confidence. 

The Ifo’s current level “suggests decent output growth, but probably significantly less than the 0.7-percent growth in the fourth quarter,” he said.

ING DiBa economist Carsten Brzeski saw the Ifo data as a sign “that German businesses never feared a full escalation of the Greek crisis or were at least not afraid of a Grexit. Instead, improved expectations signal a strong believe in the benefits of the ECB’s latest anti-deflation policy measures.”

“All in all, today’s Ifo index suggests that the comfortable life in Germany’s perfect little economic world continues,” Brzeski concluded.