German business confidence unexpectedly rose to an eight-month high in March, suggesting Europe's largest economy will return to growth even as the sovereign debt crisis curbs euro-area demand for its exports. The Munich-based Ifo institute said today its business climate index, based on a survey of 7,000 executives, increased to 109.8 from a revised 109.7 in February. Economists forecast it would remain unchanged at the initial February reading of 109.6. German manufacturing output unexpectedly contracted this month as governments and households reduced spending across the euro region, Germany's largest export market. At the same time, policy makers have made progress in tackling the debt crisis, with the European Central Bank's injection of more than 1 trillion euros ($1.3 trillion) into the banking system helping to bolster investor sentiment. Germany's benchmark DAX share index is up 18 percent this year. “The Ifo increase was driven by the retail sector, showing that the domestic economy is shielding Germany somewhat from the external turmoil," said Andreas Scheuerle, an economist at Dekabank in Frankfurt. “That will help avert a recession." The euro initially rose after the report before dropping to $1.3197, down 0.5 percent today. Ifo's gauge of the current situation was unchanged at 117.4, while an index measuring executives' expectations advanced to 102.7 from 102.4. Ifo's retailing index jumped to 10.6 from 3.7, offsetting declines in gauges of manufacturing, construction and wholesaling. Germany's economy contracted 0.2 percent in the final quarter of 2011. While it “may still be moving sideways," confidence indicators suggest “a rejuvenation of the economy in the early part of 2012" as unemployment at a two-decade low boosts household spending, the Bundesbank said last week. ECB President Mario Draghi said March 8 that the outlook for the 17-nation euro area “has improved enormously" and there are “many signs of returning confidence." Euro-area growth will recover to 1.1 percent next year after a 0.1 percent contraction in 2012, ECB forecasts show. The German economy will expand 0.8 percent this year, according to the panel of economic experts who advise the government. These data have been compiled by Bloomberg News.
