Germany reclaims title as Europe』s powerhouse
By Ralph Atkins in Frankfurt and Patrick Jenkins and Hugh Williamson in Berlin
Published: April 25 2006 03:00 | Last updated: April 25 2006 18:18
German industry has reclaimed the country』s position as continental Europe』s economic powerhouse, with business confidence surging to a fresh 15-year high.
The surprise rise in the Ifo confidence indicator on Tuesday for the fifth consecutive month defied expectations and took the index to the highest since March 1991, shortly after Germany』s reunification. Economists had expected a fall after last month』s jump.
The latest rise, from 105.4 in March to 105.9 in April, highlighted how German companies have shrugged off the impact of higher oil prices, restored international competitiveness and boosted exports amid robust global growth.
The country』s industrial renaissance further brightened the prospects for the 12-country eurozone. Axel Weber, president of the Bundesbank, predicted an upswing this year 「that becomes broader and stronger」. French business confidence reached a five-year high earlier this week.
However, the Ifo survey results suggested German business confidence might have peaked. While companies were more upbeat in April than in March about their current situation, optimism about the next six months fell for the first time since last November.
Optimism in the retail industry also dropped significantly, setting back hopes that the export-led recovery was finally feeding through into a sustained pick-up in consumer spending.
The European Central Bank has also become increasingly worried about the eurozone inflation outlook, especially as oil prices continue to soar. German inflation jumped to a higher-than-expected 2.3 per cent in April from 1.9 per cent in March, according to estimates on Tuesday based on data from five of the country』s states.
Lucas Papademos, ECB vice-president, told the European parliament yesterday that 「further increases in interest rates in the course of the year are warranted in order to ensure that price stability will be ensured」. His remarks were the first reference by an ECB official to a series of rate increases. The ECB is expected to lift borrowing costs by another quarter percentage point to 2.75 per cent in June.
The Ifo index』s trend rise since the middle of last year has been reflected in official industrial production figures, but economists were wary about over-interpreting the wider implications. German export success has boosted company profitability but there is little sign of high unemployment falling significantly. Falling real wages have also constrained consumer spending, al-though the powerful IG Metall trade union has in the past week secured a 3 per cent pay rise for 3.4m metal industry workers for the 10 months from June. Another risk is that a stronger euro will choke off the export-led recovery.
Meanwhile, Peer Steinbrck, finance minister, pledged to fight back against low taxes in competing European economies, promising a tax system that improved German companies』 global competitiveness. 「An effective tax rate of 39 per cent is not internationally competitive,」 he told a banking conference in Berlin.
He said a planned overhaul of corporate taxation should be ready by the end of May. Chancellor Angela Merkel told the same Berlin conference that Germany needed a level playing field in the way it taxes different types of companies, but warned that there was 「little scope for major tax relief」 from the planned corporate tax changes.
The reforms, a long-standing business demand, are a key part of the action programme agreed last year by the chancellor』s 『grand coalition』 of Social and Christian Democrats.
Mr Steinbrck also urged Germany』s banks to engage in a partnership with the government to avoid a backlash from the German people over controversial economic reforms.