Bloomberg News

Germany Defies Euro-Area Recession as Italy Contracts: Economy

February 24, 2012

(See EXT4 for more on the sovereign debt crisis.)

Feb. 23 (Bloomberg) -- German business confidence rose more than economists forecast to a seven-month high in February as Europe’s largest economy bucks a recession that’s gripping the region’s southern fringe.

The Munich-based Ifo institute said its German business climate index, based on a survey of 7,000 executives, climbed to 109.6 from 108.3 in January. That’s the fourth straight gain and the highest reading since July. Economists predicted an increase to 108.8, the median of 38 estimates in a Bloomberg News survey.

The European Commission forecast that Germany’s economy will expand 0.6 percent this year, helping to mitigate a euro- area contraction of 0.3 percent. This “mild recession” is driven by the shrinking economies of countries buffeted by the sovereign debt crisis, led by Italy and Spain, according to the commission’s interim economic forecast, published today.

“As soon as economic confidence improves Germany can jump out of recession very quickly, whereas for Spain and Italy it will take longer,” said Christian Schulz, an economist at Berenberg Bank in London. “We see Germany returning to growth by the second quarter. For Spain and Italy, if they grow at all by the end of the year it will be very moderate.”

The commission sees the Italian and Spanish economies contracting 1.3 percent and 1 percent respectively this year. Greece, which clinched a second international bailout this week to stave off a default, will endure a fifth year of recession and shrink 4.4 percent, the commission said.

‘Signs of Stabilization’

The euro pared gains after the economic forecast was released, trading at $1.3307 at 12:03 p.m. in Brussels, up 0.4 percent. The Stoxx Europe 600 Index fell 0.2 percent to 264.13.

The full-year euro-area-wide contraction would be the first since 2009, when a 4.3 percent drop in the wake of the U.S.-led banking crisis exposed the overborrowing and imbalances that plunged Europe into its sovereign debt troubles.

Financial markets “remain still rather fragile, but there are also signs of stabilization,” European Union Economic and Monetary Commissioner Olli Rehn said today.

Greece’s 130 billion-euro ($173 billion) rescue, agreed on by euro-area finance chiefs this week, and falling yields on government debt from Spain to Italy have buoyed German investors’ optimism that the debt crisis has been shackled for now. The German economy contracted less than forecast in the fourth quarter of 2011 and demand from abroad helped factory orders beat estimates in December, adding to signs the country can skirt a recession.

‘Substantial Drop’

With countries along the Mediterranean rim plagued by too much debt and too little competitiveness, divergences within what is supposed to be a unified continental economy have become more “pronounced,” the commission said.

Declining employment, two years of budget cuts and financing constraints for businesses will combine for a “substantial drop” in Italian domestic demand in 2012, according to the commission.

It painted a similar picture in Spain, stuck with a 22.9 percent unemployment rate and mounting doubts over whether Prime Minister Mariano Rajoy’s government will meet deficit-reduction targets.

The gloomy forecast for the euro-region economy comes as analysts see Chinese Premier Wen Jiabao signaling next month that curbing pollution, inequality and the risk of financial instability eclipse the benefits of faster economic growth.

‘Economic Transformation’

Wen will target an expansion of less than 8 percent in his report to the National People’s Congress in Beijing on March 5, according to 8 of 15 economists surveyed by Bloomberg News. The median estimate of 7.5 percent compares with the 8 percent goal maintained from 2005 to 2011, even amid the 2008-09 world recession.

“A lower target should be seen more as a signal that there’s more emphasis on economic transformation and quality of growth over speed rather than a real goal,” said Ding Shuang , a Hong Kong-based economist with Citigroup Inc., who previously worked for the International Monetary Fund and China’s central bank. “Slower growth could provide more room to proceed with reforms that are required for rebalancing.”

--With assistance from Zheng Lifei in Beijing, Kristian Siedenburg in Vienna. Editors: Patrick G. Henry, Andrew Atkinson

To contact the reporters on this story: Jeff Black in Frankfurt at jblack25@bloomberg.net; James G. Neuger in Brussels at jneuger@bloomberg.net

To contact the editors responsible for this story: Craig Stirling at cstirling1@bloomberg.net; James Hertling at jhertling@bloomberg.net


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