The direction of Germany's economy will be a deciding factor in how quickly the eurozone can emerge from recession. Business confidence is a vital predictor of future economic activity in Germany and so far this year confidence has been increasing, according to the the latest closely followed survey from the German Institute for Economic Research (IFO).
The IFO index rose by 2.5 points to 100.5, the third successive monthly rise since September after the index bottomed out at 95 in the aftermath of fears over the fate of the euro in mid-2012. Economists would naturally expect confidence to rebound and return to the mean after plunging to such depths, but the fact that the IFO exceeded all expectations has fuelled hopes that Germany's export industries are seeing a renewal of growth in some markets. The other promising technical point is that a rise in IFO over three months is generally followed by a sustained rise over the following 12 to 24 months, all of which could point to the index reaching heights last seen in 2010. The stock market has been quick to respond, with the Dax rising by 1.3 per cent in the days after the announcement.
The size of Germany's manufacturing sector - over 25 per cent of the economy with an overwhelming export focus - means it can ride upturns in trade very quickly. The easing of the crisis in the eurozone, mainly through the bond-buying activities of the European Central Bank, has added weight to a relief rally in stock markets. For example, foreign investors are starting to increase the flow of funds back into the eurozone, with periphery bond markets such as Spain and Italy benefiting the most.
