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Rise in German Business Morale Masks Uncertainty Over China

  • Reuters

FILE - Traders are pictured at their desks in front of the DAX board at the stock exchange in Frankfurt, Germany, Aug. 21, 2015.

FILE - Traders are pictured at their desks in front of the DAX board at the stock exchange in Frankfurt, Germany, Aug. 21, 2015.

German business morale rose in August, but the exports that drove a second-quarter expansion may falter later this year if China's slowdown hits Europe's largest economy, the Ifo economic institute said.

Munich-based Ifo said on Tuesday its business climate index, based on a monthly survey of some 7,000 companies, edged up to 108.3 in August from 108.0 in July. The reading was the strongest since May.

The sentiment reading exceeded the Reuters consensus forecast of 107.7 and came soon after official figures showed rising exports outstripped gains in imports to power German growth of 0.4 percent in the second quarter.

Ifo economist Klaus Wohlrabe said market turmoil in China, fed by concerns about an economic slowdown, was barely reflected in the August sentiment survey. But neither were Tuesday's moves by China's central bank, which cut interest rates and relaxed bank reserve requirements.

"The subject of China and emerging markets will have a greater importance in future," Wohlrabe told Reuters.

Chinese stocks tumbled again on Tuesday, despite a rebound in other Asian markets. The policy moves by the Chinese central bank came after markets closed in China.

In Germany, Economy Minister Sigmar Gabriel played down the risk to Europe's largest economy, saying developments in China would not damage the German economic outlook.

"The concerns that have arisen because of developments in China are certainly justified. Nevertheless, I think you have to say, from what we can judge, that it will not contribute to a deterioration of developments in Germany," he said, adding positive momentum in Europe and lower oil prices were a help.

FILE - French Economy Minister Emmanuel Macron (L) and Germany's Economy Minister Sigmar Gabriel attend a news conference to present the Franco-German report on economic reforms and investment at the Bercy Finance Ministry in Paris, Nov. 27, 2014.

FILE - French Economy Minister Emmanuel Macron (L) and Germany's Economy Minister Sigmar Gabriel attend a news conference to present the Franco-German report on economic reforms and investment at the Bercy Finance Ministry in Paris, Nov. 27, 2014.

The German government is sticking to its forecasts for growth of 1.8 percent both this year and next, a senior official at the Economy Ministry, Jeromin Zettelmeyer, told Reuters. "We are on track," said Zettelmeyer. "Our forecasts were already cautious but they are realistic, as shown now," he said.

The German economy expanded by 1.6 percent last year.

Ifo economist Wohlrabe said that he did not see further significant growth in German exports, but stuck to his forecasts of 0.4 percent growth in Germany for the third quarter and 1.7 percent growth for the full year.

Weak investment

The German government has some reason to be sanguine, since many companies have work in the pipeline. Figures released earlier this month showed industrial orders recorded their biggest gain since early 2011 in April-June, thanks mainly to foreign demand.

Germany's exports, which usually drive growth, were healthy at the mid-point of 2015, figures from the Federal Statistics Office showed.

Exports rose by 2.2 percent on the quarter in the April-June period, outperforming a 0.8 percent increase in imports. That meant foreign trade added 0.7 percentage points to gross domestic product while domestic demand subtracted 0.3 percentage points.

But investments flagged in the quarter, clouding the picture as concern over a global economic slowdown intensify.

"Companies are not investing as they really should," said Ulrike Kastens at Sal. Oppenheim.

"The low interest rate is not decisive for them, but rather developments in key markets. Here there are major question marks, as developments in China and other emerging markets
show."

Earnings by German companies have been exceeding expectations, though they are concerned about the uncertain global outlook.

Around half of Germany's 30 blue-chip companies reported consensus-beating financial results for April-June. More than two-thirds nonetheless stuck with their guidance for the year as
a whole as political and economic uncertainties remain in focus.

Gross capital investment subtracted 0.1 percentage points from GDP in the second quarter and inventories deducted 0.4 percent as companies ran down stocks.

"China worries - or more generally the suspicion that important emerging markets are no longer really 'emerging' – are enough to weigh on capital spending also going forward," said
Holger Sandte at Nordea.

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