German business morale rises with China concerns subdued

Pedestrians pass by a Media Markt retail store in Berlin. The Ifo institute’s German business climate index climbed to 108.3 from 108 in July. The median estimate was for a decline to 107.6, according to a Bloomberg survey of economists.Bloomberg, Reuters/FrankfurtGerman business confidence unexpectedly rose in August as companies brushed off concerns that China’s slowdown will drag on the nation’s economic growth.The Ifo institute’s business climate index climbed to 108.3 from 108 in July. The median estimate was for a decline to 107.6, according to a Bloomberg survey of economists.The Bundesbank said in its August monthly bulletin that Germany is poised for “solid” growth in the rest of the year. Domestic spending, bolstered by record-low unemployment and borrowing costs, could provide a bulwark against weakness in China, the nation’s third-biggest trading partner.“Neither the Greek crisis nor the new Chinese uncertainties and stock-market turbulence have been able to dent German business optimism,” said Carsten Brzeski, chief economist at ING Diba in Frankfurt. “The German economic model has become much more balanced than critics have been complaining about.”German overseas sales climbed 2.2% in the three months through June, according to data yesterday from the Federal Statistics Office in Wiesbaden. Private consumption rose 0.2%, while capital investment shrank 0.4%. The economy expanded 0.4%, matching an August 14 estimate.China, which devalued the yuan this month as it struggles to manage a slowdown, poses a risk as the country’s demand has been key for German companies in recent years. Germany’s trade deficit with China fell to the lowest this century in 2014 at about €5bn ($5.8bn). The gap has widened to €7.3bn in the first half of 2015.Chinese stocks plunged again yesterday to extend the steepest four-day rout since 1996, with investors concerned that the government is abandoning market-support measures. The Shanghai Composite Index has slumped 22% since August 19.Germany’s DAX Index has dropped 20% since reaching a record in April, entering a bear market on Monday. The index extended a rebound after the Ifo report and was up 3.2% at 11:48 a.m. Frankfurt time.“What’s happening in China’s stock market surely is a reason for concern, but in our view it won’t hurt developments in Germany,” Vice Chancellor Sigmar Gabriel told reporters in the eastern city of Jena. “I believe the good economic development in Germany will continue.”The Ifo report comes after Markit Economics said on Friday that German manufacturing growth accelerated to the fastest pace in more than a year this month. The Bundesbank said this month that domestic demand will feature more strongly in the second half of the year.The euro-area economy, which expanded 0.3% in the second quarter, may also offer support. A renewed decline in oil prices and massive monetary stimulus from the European Central Bank is helping the region recover from its longest-ever recession.Ifo’s current-assessment index rose to 114.8 in August from 113.9 in July, while a gauge of expectations dropped to 102.2 from a revised 102.3. The surveys cover about 7,000 companies in manufacturing, construction, wholesale and retail. “The subject of China and emerging markets will have a greater importance in future,” Wohlrabe told Reuters. Chinese stocks tumbled again yesterday, despite a rebound in other Asian markets. The policy moves by the Chinese central bank came after markets closed in China. The German government is sticking to its forecasts for growth of 1.8% both this year and next, a senior official at the Economy Ministry, Jeromin Zettelmeyer, told Reuters. “We are on track,” said Zettelmeyer. “Our forecasts were already cautious but they are realistic, as shown now,” he said. The German economy expanded by 1.6% last year. The German government has some reason to be sanguine, since many companies have work in the pipeline. Figures released earlier this month showed industrial orders recorded their biggest gain since early 2011 in April-June, thanks mainly to foreign demand.  Germany’s exports, which usually drive growth, were healthy at the mid-point of 2015, figures from the Federal Statistics Office showed. Exports rose by 2.2% on the quarter in the April-June period, outperforming a 0.8% increase in imports. That meant foreign trade added 0.7 percentage points to gross domestic product while domestic demand subtracted 0.3 percentage points. But investments flagged in the quarter, clouding the picture as concern over a global economic slowdown intensify. “Companies are not investing as they really should,” said Ulrike Kastens at Sal Oppenheim. “The low interest rate is not decisive for them, but rather developments in key markets. Here there are major question marks, as developments in China and other emerging markets show.”  Earnings by German companies have been exceeding expectations, though they are concerned about the uncertain global outlook. Around half of Germany’s 30 blue-chip companies reported consensus-beating financial results for April-June. More than two-thirds nonetheless stuck with their guidance for the year as a whole as political and economic uncertainties remain in focus. Gross capital investment subtracted 0.1 percentage points from GDP in the second quarter and inventories deducted 0.4% as companies ran down stocks. “China worries — or more generally the suspicion that important emerging markets are no longer really ‘emerging’ — are enough to weigh on capital spending also going forward,” said Holger Sandte at Nordea.