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Germany in upbeat mood
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January 20, 2000: 7:57 a.m. ET
Economists say business confidence leapt in December, third straight month
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LONDON (CNNfn) - Germany's business climate improved for the third straight month in December according to a report released Thursday, amid growing signs that Europe's economic recovery is gaining speed.
The data bolstered a widespread conviction among euro-zone economists that the European Central Bank is likely to raise interest rates by the end of the first quarter. Some believe that increase may be as much as 50 basis points, or half a percentage point, from the current short-term lending rate of 3 percent.
At its meeting Thursday, though, the ECB left rates unchanged for the moment, as expected. Economists said inflationary fears are still based on scant evidence of an actual inflation threat.
The closely-monitored Ifo business confidence index jumped to 99.6 in December, in line with market forecasts for a strengthening from November's reading of 98.9. The key business expectations component of the index rose to 108.3 in December from 107.6 in November.
The European single currency, the euro, eased 0.2 cents towards the $1.01 mark after the figures were released, reflecting some traders' expectations of an even greater jump in the business confidence index. Following rumors circulating earlier in the week, some had been hoping the index would break through 100, reaching levels not seen since March 1998.
The robust numbers lent credence to market forecasts for a near-term rate hike designed to head off inflationary pressures in the 11-nation euro-zone.
Marco Kramer, an economist with Paribas based in Frankfurt, said buoyant domestic activity played a larger role in the December increase in the Ifo index than in November or October, when the bulk of the rise was attributable to stronger trends in export-oriented industry. Kramer pointed in particular to a revival in Germany's retail and construction sectors, spurred by employment growth.
Kramer noted that the Ifo numbers heightened expectations Germany would report a quickening in GDP growth in the fourth quarter. He added that while recent comments by central bankers were dovish on interest rates, the ECB had nonetheless entered a tightening mode in which it is more prone to raise rates at early signs of price rises.
In the eastern part of Germany, which lags behind the more prosperous western region, the key business climate index rose to 105.3 in December from 104.1 the previous month. Business expectations were stable at November's revised level of 87.5.
Economists told Reuters that plans for sweeping tax reform in Germany may have boosted the Ifo reading, while paving the way for another banner reading in January. The tax package calls for scrapping the capital gains tax companies must pay on the sale of cross-shareholdings in one another.
If implemented, some say, the package could spur a major overhaul of Germany's traditionally sclerotic financial sector, seen as the major beneficiary of the reform. 
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Ifo Institute
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