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By Sarah Marsh
BERLIN (Reuters) - German business morale rose slightly more than expected in July, edging up for a third straight month in a sign Europe's largest economy is picking up steam after a dismal end to last year and weak start to 2013.
The Ifo think tank said its business climate index, based on a monthly survey of some 7,000 firms, rose to 106.2 in July from 105.9 in June. The reading came in just above the consensus forecast in a Reuters poll of 40 economists for a rise to 106.1.
"The economy is starting to build a better head of steam, thanks to the export sector and the fact that consumers seem to be gaining better confidence," said David Brown, an economist at New View Economics.
"If the improvements continue at this rate Germany could see growth upwards of 1 percent this year and 2 percent next year."
The government expects growth of 0.5 percent this year.
The economy has not become a major election issue ahead of a national vote on September 22 and is unlikely to if it remains robust and unemployment stays low, boding well for German Chancellor Angela Merkel as she seeks a third term in office.
A bastion of strength at the start of the euro zone crisis, the export-oriented German economy narrowly avoided a recession at the start of 2013 as the global outlook worsened, weighing on demand for German products and willingness to invest.
The recent picture has been mixed although it suggests the economy is gaining traction. Industry orders and output tumbled in May yet a purchasing managers' index (PMI) showed the manufacturing sector returning to growth in July.
Non-industrial data has picked up more, with consumer morale improving, retail sales rising and joblessness falling in stark contrast to the soaring unemployment in much of Europe.
"All in all, the business mood is pretty reasonable, although we are not about to see a boom," said Ralph Solveen at Commerzbank.
Munich-based Ifo said firms were slightly less upbeat about their business outlook, with a sub-index inching down one tick to 102.4 in July. They were, however, more optimistic about their current business, with the conditions sub-index rising to 110.1 from 109.4.
Reflecting the improved mood, Germany's Mercedes-Benz Cars <DAIGn.DE> said this week it expected good sales in July and the second half of the year.
(Additional Reporting by Annika Breidthardt, Madeline Chambers and Alexandra Hudson; Editing by Madeline Chambers)