FRANKFURT, Germany’s famously thrifty consumers may finally be more willing to spend, according to data released Monday, raising the prospect that domestic demand could take the place of flagging exports and help pull the rest of Europe out of recession. The Ifo business climate index, which is considered a reliable predictor of the direction of the largest economy in Europe, rose slightly more than expected in March, to its highest level since July, the Ifo Institute in Munich said. Unusually, retailers accounted for the rise in the Ifo index; manufacturers and builders became a bit more pessimistic.

While it is probably early to declare a turning point, there are signs that falling unemployment and rising real estate prices are giving Germans confidence to do more shopping.
“Domestic components are holding up better now,” said Thomas Harjes, an economist at Barclays in Frankfurt. “We are at the beginning of seeing some rebalancing of the German economy.”
Germany’s economy has traditionally been driven by exports of cars and machinery, while domestic demand has been comparatively weak. In fact, the country has been something of a graveyard for retailers. Wal-Mart gave up trying to crack the German market in 2006. Karstadt, the nation’s largest chain of department stores, filed for insolvency in 2010, although it has since restructured and become profitable.

Germany has the largest trade surplus in Europe, which partly reflects the success of manufacturers like Daimler and Siemens, but also is a function of weak demand for imported goods. The rest of the euro zone, much of which is stuck in recession, would benefit if Germans bought more products and services from their neighbors. In addition, stronger domestic demand would make Germany less susceptible to economic ups and downs in major export markets like China and the United States. While the Ifo index pointed only to modest growth in Germany, the resiliency of German business confidence helped calm fears that the nation’s economy was slowing down. Last week, a survey of purchasing managers by the research firm Markit signaled that the broader euro zone probably slipped into recession in the first quarter of 2012. The Markit survey also showed that German manufacturers were becoming less optimistic
Mr. Harjes of Barclays pointed out that the Ifo index surveys 7,000 companies, seven times as many as the Markit survey. The Ifo survey therefore captures more small and midsize enterprises oriented toward domestic customers, he said. While economists generally portrayed the Ifo results as positive, some were more cautious. Hans-Werner Sinn, president of the Ifo Institute, noted that the indicator rose more slowly in March than in previous months. “The German economy is losing some of its momentum,” he said in a statement. Few economists expect Germany, with its aging population, to become a nation of frenzied shoppers. But after years of stagnation, property values are rising in major cities like Berlin and Frankfurt. That tends to make homeowners feel wealthier and more confident about spending. In addition, unemployment is near its lowest point since reunification, at 7.4 percent as measured by the Federal Employment Agency. While the rate has been falling for several years, Germans were unsettled by changes to labor laws and are only now feeling secure enough to spend, Mr. Harjes said. “Structural reforms created a lot of uncertainty,” Mr. Harjes said. “People weren’t confident enough to see there are also opportunities.”
FRANCIS TAWIAH (Duisburg – Germany)

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