German business confidence soars

GERMAN corporate morale surged to its strongest level since reunification this month, showing firms expect the economy to weather a tax hike in 2007 and raising expectations interest rates could rise further.

The Munich-based Ifo research institute said its business climate index, based on a monthly poll of around 7,000 firms, unexpectedly rose to 108.7 from 106.8 in November.

The reading, the highest since the institute began compiling pan-German figures in 1991, surpassed all the forecasts in a Reuters poll of 52 economists and came in well above a consensus for 106.8. Predictions ranged between 105.4 and 108.5.

“These are fantastic figures,” said DekaBank economist Andreas Scheuerle. “Companies still expect a pickup, even if a dip comes at the start of the year due to the sales tax increase.”

Germany’s ruling coalition will raise value-added tax (VAT) by three percentage points to 19% from January 1, to help ease the burden on Germany’s public finances after efforts this year to tackle the country’s fiscal largesse.

Ratings agency Standard & Poor’s (S&P) said it affirmed its ‘AAA’ long-term and ‘A-1+’ short-term credit ratings on Germany.

“Progress on fiscal consolidation, the grand coalition government’s immediate focus, has been swifter than expected,” Standard & Poor’s credit analyst Kai Stukenbrock said.

The euro extended gains and Bund futures reversed course to hit session lows after the Ifo survey.

“The German economy is experiencing a very strong economic boom, as last observed in 1990,” Ifo said.