Eurozone rallies on German cheer

GERMAN business confidence has bounced back over the past month, in the latest sign that the eurozone's biggest economy is on the road to recovery. The Ifo business climate index registered 91.5, up sharply from last month's 90.5 and surpassing economists' expectations.

The new-found optimism follows a surprise fall in confidence last month and takes the index back to levels seen in March. It will come as a relief to Chancellor Gerhard Schoeder as he gears up for September's national elections. High unemployment, rising trade union militancy and a spate of high-profile corporate bankruptcies have been combining with a weak economic outlook to pile pressure on his Social Democratic government.

Hans-Werner Sinn, president of Ifo, a Munich-based economic institute, said the improvement had been driven by increased optimism in the manufacturing and wholesale sectors, although Germany's retail and construction sectors remained weak. The euro rallied briefly on the news, but soon settled back to 92 US cents, or 63.25p against sterling.

Economist Philip Shaw at Investec, said: 'The numbers are very encouraging, with Germany benefiting from export-led growth. But I would be circumspect about heralding an economic spring. Consumer confidence is still stalling and looks set to cap economic growth this year.'

That view was reinforced by a breakdown of the data, which showed the improvement was driven almost entirely by a surge in optimism about the future, although sentiment about current conditions edged up. The expectations index jumped to 106.1, while the current conditions index registered 77.6. UBS Warburg's Edward Teather said the gap between the two 'highlights the risk that financial markets may be expecting too much too soon from the cyclical growth recovery'.

Official figures last week showed Germany's gross domestic product grew by 0.2% during the first three months of this year, outstripping Britain, where GDP remained at a standstill. However, Germany was hit harder by the global economic downturn than Britain at the end of last year, with its economy shrinking by 0.3% in the fourth quarter. Conditions remain extremely fragile.

Nevertheless, the pick-up in confidence will reinforce expectations that the European Central Bank, concerned about stubborn inflation, will raise interest rates from 3.25% next week.