Business sentiment rose sharply in Germany this month, though the assessment of the current business situation in Europe's largest economy fell for the first time in almost two years.
The Center for European Economic Research, or ZEW, released its closely watched Ifo index, which rose to 5.8 from 2.9 in February. The group noted that the index remains well below its historical average of 33.2.
The reading on current conditions fell to 69.2 from 70.9, the first pullback since June of 2005
The group said domestic incoming orders developed favorably despite the increase in value-added tax, and noted that consumer confidence has also stabilized thanks to good news from the German labor market. The decline in incoming orders from abroad, on the other hand, is disconcerting as this could be interpreted as the beginning of a fall in world demand. Rising oil prices are another risk factor.
"The German economy is still expanding and the demand for labor rising. This should not, however, be misused by the parties in the collective bargaining process to push through excessive wage claims", said ZEW President Prof. Dr. Dr. h.c. mult. Wolfgang Franz.
Economic expectations for the euro zone also declined somewhat. The indicator decreased slightly by 1.7 points and now stands at plus 5.1 points. The corresponding indicator for the current economic situation in the euro zone increased marginally this month by 0.2 to 66.9 points.
ZEW said 296 analysts and institutional investors participated in this month's survey, which is conducted on a monthly basis. The participants were asked from February 26 to March 12, 2007, about their medium-term expectations concerning economic activity and capital markets.