GERMANY BACK IN THE FAST LANE

Solas Power has seen from recent reports that German, French and Belgian business sentiment picked up by an unexpectedly high degree at the start of the year, suggesting that Germany’s broadening economic recovery is sustaining manufacturing in other parts of the eurozone.

Germany’s Ifo institute said its business climate index hit 110.3 points in January, up from 109.8 the previous month and its highest level since it started tracking sentiment 20 years ago.

The French statistics agency Insee said its manufacturing sentiment index jumped 6 points to 108, the biggest monthly rise since mid-1999, while Belgium’s central bank said its business confidence tally rose 1.4 points to 4.5. With foreign orders filling Belgian companies’ order books, François Cabau at Barclays Capital said the country’s economic momentum “has a lot to do with the pace of its trading partners – most importantly Germany”.

Economists see Europe’s largest economy growing about 2.5 per cent this year, against forecast French growth of only 1.5 per cent and a Belgian rate of 1.8 per cent as public spending cuts and oil price rises bite.

But some said the uptick in sentiment could be a sign that German demand is sustaining French companies in particular more than expected. The two countries are each other’s biggest export markets.

“German and French companies are powering ahead in Europe, reinforcing the upswing of each other,” said Andreas Rees at UniCredit in Munich. He welcomed the revival “of the good old Franco-German economic axis”.

This would cut Germany’s reliance on exports to Asia, he added. With fewer jobless, stronger private consumption and business investing once more, “one should not exclude” the possibility of German growth nudging 3 per cent.

Carsten Brzeski, economist at ING bank in Brussels, said the Ifo data were “a strong signal” that the German economy would “continue to power ahead” after its stellar growth of 3.6 per cent in 2010.

Last year’s export-led recovery drove unemployment down, spurring private consumption for the first time in years. Now economists are expecting domestic demand to receive a further boost from corporate investment.

“The conditions to initiate a virtuous circle [of growth] have hardly been better in 15 years,” Mr Brzeski said in a note to clients.

The German government on Wednesday forecast that the economy would grow 2.3 per cent this year – up half a point from its autumn forecast – with the average jobless rate falling to 7 per cent from 7.7 per cent in 2010.

Aided by more private spending and corporate investment, domestic consumption would raise GDP by 2 per cent, contributing three-quarters of economic growth, up on a two-thirds share last year.