German Ifo index jump defies recession worries

FRANKFURT (MarketWatch) � A widely-followed measure of German business confidence jumped more than expected in February, defying fears that Europe�s largest economy and the debt-troubled euro zone have slipped into recession.

The Munich-based Ifo Institute on Thursday said its business climate index rose to 109.6 in February from a reading of 108.3 in January, marking its highest level since July. Economists had forecast a reading of 108.8.

Ifo�s expectations index, which measures business expectations for the upcoming six months, rose to 102.3 from 100.9, while the current-conditions index rose to 117.5 from 116.3. The indexes are based on a monthly survey of around 7,000 German firms across the manufacturing, construction, wholesale and retail sectors.

The data come a day after another closely-watched round of survey-based figures � the preliminary February purchasing managers indexes � showed business activity in Germany slowed and euro-zone activity unexpectedly contracted.

Click to Play German business confidence soars

Germany surprised everyone by reporting a much greater improvement in business sentiment than expected. Is the German economy stronger than most forecasts predict? Dow Jones's Margit Feher has been analyzing the new data. Photo: Getty Images

The euro EURUSD �extended a gain after the Ifo data to trade above the $1.3340 level for the first time since mid-December. It changed hands in recent action at $1.3307, up from $1.3246 versus the dollar in North American trade late Wednesday. See Currencies.

The expectations index tends to be a better indicator of GDP growth and now points to annual German growth of around 2%, in line with fourth-quarter results, said Ben May, European economist at Capital Economics. It would also point to a �pretty sharp� quarterly rise in first-quarter GDP after a 0.2% quarterly contraction in the final three months of 2011.

Indeed, the reading would point to a 1.3% quarterly jump in quarterly growth in the first three months of 2012, a result that appears �highly unlikely,� said Klaus Baader, European economist at Societe Generale.

The data must also be balanced against the PMI readings, which point to only modest German growth in the first quarter, said May, who continues to expect the German economy to stagnate in 2012..

�With global demand growth set to be weaker than last year and the euro still pretty strong, this year will be a challenging one for exporters. And if the euro-zone debt crisis intensifies over the coming months, hitting consumer and business sentiment, domestic demand will probably weaken too,� May said.

Other economists saw the data reinforcing upside risks to their German first-quarter growth forecasts.

�This is an unequivocally strong survey containing upside news across all major components,� in contrast to Wednesday�s PMI readings, said James Ashley, senior European economist at RBC Capital Markets.

The broad improvement in the index, along with other surveys, suggests that the contraction in GDP in the fourth quarter �is very likely to have been a one-quarter slip-up rather than the beginning of a recession,� Baader said.