German Business Shows Signs of Confidence

German business confidence edged upwards in January for the first time in eight months, but Europe's largest economy remains in trouble, economists said today.

According to a key survey of company executives from the Ifo thinktank, Germany's business climate rose to 87.4 from its December level of 87.3 - the lowest for 10 months.

The improvement was the first since last May, with managers' assessment of both the current situation and the outlook for the next six months brightening. But Europe's former powerhouse has hardly turned the corner, analysts said.

"The good news was the headline Ifo index showed its first rise in eight months in January," said Robert Prior-Wandesforde, an economist with HSBC, "but the bad news was that it rose only 0.1%. Moreover, at 87.3 it is apparently consistent with a year-on-year decline in German industrial production of around 5-6%."

The German economy last year grew just 0.2% (compared to 1.7% in the UK) and most economists forecast a rate of less than 1% this year - too slow to reduce Germany's stubbornly high jobless total or provide much impetus for the global economy. In December, more than 4.2 million Germans were out of work - a jobless rate of 10.1%, with the number expected to rise this month.

Hans-Werner Sinn, the head of Ifo, agreed that the small rise in business confidence was not conclusive proof that the German economy was on the mend.

"Overall, it's too early to conclude that the survey result signals a trend change," Mr Sinn said, arguing for a further reduction in interest rates by the European central bank (ECB) to help to boost the economy. The ECB has come under persistent criticism for not lowering the cost of borrowing fast enough to boost growth in the eurozone.

Germany's economic weakness is a cause for worry elsewhere in Europe. The Bank of England, in minutes from its last interest rate meeting earlier this month, said it remained concerned that weak confidence in Germany might begin to spill over to other countries in the euro area.

Moreover, weak growth and increased public spending have put Germany on a collision course with the European Commission as Berlin looks set to breach deficit limits set out in the eurozone's stability and growth pact. Under EC rules, a country faces fines if its budget deficit exceeds 3% of gross domestic product.

Last week, the German chancellor, Gerhard Schröder, began talks with business leaders and unions in a bid to push through reforms designed to revive the economy. But the chancellor's standing is low, coming under fire from all sides for his handling of the economy since his September re-election.

"There is probably some strength in exports," said Mr Prior-Wandesforde, "but the risk is that the rapid rise in the euro will at least temper these gains. Overall, it looks like a gloomy, albeit not disastrous, outlook for the German industrial sector."