German business morale unfazed by banking turmoil

German business morale unexpectedly rose in March, adding to signs that Europe's largest economy is stabilizing despite recent turmoil in the banking sector, a survey showed on Monday.

The Ifo institute said its business climate index jumped to 93.3 from a reading of 91.1 in February. A Reuters poll of analysts had pointed to a March reading of 91.0.

The improvement in business morale for the fifth month in a row was driven primarily by business expectations, which rose to 91.2 in March from a revised 88.4 the month before, its highest level in at least a year, according to Ifo.

 

The managers at 9,000 companies surveyed by Ifo had not changed their positive sentiment, despite the banking sector turmoil, likely because no German bank has so far been affected, Ifo head of surveys Klaus Wohlrabe told Reuters.

"Despite the turbulence in the financial markets, the German economy is starting spring with a good feeling," he said.

The German government has said the economic situation should improve from spring onwards, and in January revised up its economic forecast for 2023, predicting growth of 0.2 percent.

 

Analysts welcomed the unexpected increase but warned against being too optimistic about what it means for the months ahead.

"All in all, the business climate is not yet based on anything more than hope," said economist Alexander Krueger at private bank Hauck Aufhaeuser Lampe, adding: "It still doesn't look like a real upswing for 2023."

The European Central Bank's interest rate hikes since last July are taking effect with a time lag of at least four quarters, which argues against economic recovery in the second half, said Commerzbank chief economist Joerg Kraemer.

Despite calls by some investors to hold back on policy tightening until turmoil in the banking sector eases, the ECB raised its refinancing rate by 50 basis points to 3.50 percent this month, leaving the door open to future hikes as it forecast inflation would remain above its 2 percent target through 2025.