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Thursday, 18 May, 2000, 14:58 GMT 15:58 UK
German economy set to boom
German industry is expanding production again
German industry is expanding production again
Business confidence in Germany has reached a nine-year high, raising hopes that the ailing economy is finally on the track to recovery.

The closely watched Ifo business climate index increased in April to 101.2, its highest level since April 1991 and well ahead of analysts' expectations.

Germany is Europe's economic powerhouse
Germany is Europe's economic powerhouse
The German economy, the largest exporter in Europe, is benefiting from the weak euro, which has make its goods cheaper abroad.

"It's a nice figure. It shows us that expectations have benefited from the weakened exchange rate," said Eckhard Schulte, senior economist at Industrial Bank of Japan in Frankfurt.

Many economists now expect the German economy to grow by more than 3% this year, a big improvement on the 1.8% growth rate recorded last year.

A German economic recovery is crucial to the health of the eurozone, as the country makes up one-third of total eurozone output.

But while countries on the periphery of Europe, like Spain, Portugal and Ireland, have boomed, Germany until now has been mired in a slowdown with stubbornly high unemployment of around 10%.

The survey of business confidence is considered a leading indicator, pointing to trends that might develop later throughout the economy.

Euro still sliding

Despite the stronger than expected German data, the euro was still sliding on foreign exchange markets following the rise of US interest rates.

The euro's weakness has helped exporters
The euro's weakness has helped exporters
At 1455GMT it was trading at $0.8931, just above its record low of $0.8844 set on 4 May.

"There's no reason for the euro to go higher - verbal intervention, we know it doesn't work; physical intervention, we know nobody is really ready, in terms of concerted intervention with the Fed and the [Bank of Japan]," said Gilles Borrel, of Westdeutsche Landesbank.

The dollar has been boosted by the steep 0.5% interest rate hike this week by the US central bank, and expectations that it will continue to raise rates in the future.

The dollar is also trading at a six-year high against the pound, and has noticeably strengthened against the Japanese yen.

ECB may raise rates

The strength of the German economy may encourage the European Central Bank (ECB) to raise interest rates when it meets next week in Frankfurt.

The ECB has already raised rates four times to 3.75%, but the interest rate differential with the United States is higher than ever.

Many economists expect the Bank to move rates to 4% now that the danger of an economic slowdown in Germany has passed.

"It's a clear signal for the ECB that an increase of interest rates doesn't harm. I expect a rise by 25 basis points," said Gerhard Grebe of Bank Julius Baer.

That might help blunt the potential inflationary potential of a weak currency.

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See also:

16 May 00 | Business
Germany set for windfalls
28 Jan 00 | Business
Germany's economic resurgence
26 Nov 99 | Business
German budget cuts approved
23 Jun 99 | The Economy
Germany's radical economic revival plan
09 May 00 | Business
Euro takes new beating
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