Optimism on German economy as confidence hits 17-month high

Confidence among German investors hit a 17-month high in August amid signs of a pick-up in domestic demand, which has long been a drag on growth in Europe's largest economy.

The expectations indicator, compiled by the Mannheim-based ZEW Centre for European Economic Research, jumped to 50 from 37 in July. The index is based on a poll of 322 analysts and institutional investors. The rise took the index above its long-term average of 34 and beat the consensus forecast of 38.5.

ZEW said: "Economic optimism in Germany may have been fuelled by the development of the world economy, which continued to be sound in spite of high oil prices, but also by the first signals of a revival of domestic demand."

It added: "Hopes for a revival are motivated by an increase in incoming orders, especially from the domestic market."

Separate figures released by the Federal Statistics Office showed that Germany's domestic economy grew by 0.3 per cent in the second quarter, the first increase in nine months, fuelled by business investment.

The Economy and Labour minister Wolfgang Clement said the ZEW survey showed that Germany was "on the right path. There are more and more positive signals".

Economists said the figures raised hopes that Germany's economic recovery, which has until now been completely reliant on exports, will also be supported by domestic demand.

Julian Callow, at Barclays Capital, said confidence had probably been fuelled by hopes for a change of government in the snap election called for 18 September. "It's an encouraging sign," he said. "Hopes of a change after the election in September, the stock markets and the global economy are all contributing to what is a significant increase."

Angela Merkel, the leader of the opposition conservative party, is favoured to oust Chancellor Gerhard Schröder in the election and is expected to pursue a more business-friendly policy. The latest polls give her Christian Democratic Party a lead of some 12 to 14 points over Mr Schröder's Social Democrats.

A separate ZEW gauge of current conditions remained negative but improved to -61.1 from -66.7 in July. The monthly survey usually gives a pointer to the direction of the Ifo Institute's closely watched measure of business sentiment, which is regarded as a reliable indicator of the health of the German economy. The institute is due to publish the results of its August survey tomorrow.

But some economists were more sceptical about the outlook and warned that a sharp rise in oil and petrol prices would hit Germans' pockets, holding back the long-awaited revival in consumer spending.