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UPDATE 2-Macron fuels German economic optimism as core euro-axis tones up
May 23, 2017 / 12:57 PM / 6 months ago

UPDATE 2-Macron fuels German economic optimism as core euro-axis tones up

* Ifo business climate index hits post-reunification high

* Broad-based GDP upswing in Q1 expected to continue

* Macron victory brings relief for German exporters

* Strong data a boost for Merkel as German election nears (Adds details, quotes, analysts)

By Michael Nienaber

BERLIN, May 23 (Reuters) - Business morale in Germany hit its highest since reunification in May and an already rosy growth outlook brightened further, tapping into hopes that Berlin will ally with Paris in spearheading a broad-based economic revival in Europe.

France is Germany’s second biggest trading partner and europhile Emmanuel Macron’s presidential election win over far-right protectionist rival Marine Le Pen in early May has given fresh impetus to neighbouring exporters.

That boost in confidence emerged in Tuesday’s Ifo business climate index, which jumped to 114.6 - the highest since its current data set began in 1991, the year after West and East Germany unified.

Klaus Wohlrabe, economist for the Munich-based Ifo institute, said the positive news of Macron’s victory had provided a tailwind. “It is a signal that the European Union is not under acute pressure, as it was a year ago,” he said.

Neither the countdown to Britain’s departure from the EU nor the “America first” polices of U.S. President Donald Trump had succeeded in putting a brake on the German economy, he added.

Growth in the economy, Europe’s largest, accelerated to 0.6 percent quarter on quarter in the first three months of 2017, separate data showed on Tuesday. The Federal Statistic Office cited strong exports, booming construction and higher spending by households and the state as factors.

Germany has outpaced France in recent years, helped by record low unemployment as labour reforms similar to ones that Macron has said he also plans to implement kicked in.

Since Macron took office, Chancellor Angela Merkel has stressed the lead role she believes a Franco-German axis should play at the heart of a Europe of strengthened economic reforms and deeper integration.


She now looks odds-on to remain the pillar of that bilateral relationship beyond her country’s national elections in September, for which earlier this year her conservatives were running neck-and-neck with their Social Democrat (SPD) rivals.

“This impressive string of strong economic data is boosting Merkel’s already good chances of getting re-elected even further,” said Timo Klein, economist for Markit, which also published its composite Purchasing Managers’ Index (PMI) for May on Tuesday.

The main question now was whether she could form a new coalition government with just the business-friendly Free Democrats (FDP) - as a poll published on Tuesday suggested - or if she would be forced into another ‘grand coalition’ with the SPD, he said.

Markit’s PMI showed Germany’s private sector grew at the fastest pace in more than six years due to stronger-than-expected factory activity.

Tuesday’s data prompted some observers to raise their economic forecasts.

The DIHK Chambers of Industry and Commerce raised its 2017 growth view to 1.8 percent from 1.6 percent.

Unicredit economist Andreas Rees said growth could be as high as 2 percent. “Germany has become a powerful two-engine economy benefitting from strong domestic demand and surging global trade,” he said.

Ifo chief Clemens Fuest said the surge in business sentiment combined with other key economic indicators pointed to growth of 0.6 percent in the second quarter.

The Ifo report, based on a monthly survey of some 7,000 firms, showed that managers’ assessments of the current business situation and their outlook for the coming six months both improved markedly.

A sector breakdown showed the main boost came from improved sentiment in manufacturing while optimism in wholesaling and construction also rose.

“Today’s strong German data add to the evidence that, not only the German economy, but the entire euro zone economy could become the positive growth surprise of 2017,” ING bank economist Carsten Brzeski said.

“With political risks now ebbing away, economics have quickly taken over.” (Reporting by Michael Nienaber; Editing by Paul Carrel and John Stonestreet)

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