BERLIN, March 25 - Germany's key Ifo business climate indicator -- to be published at 0900 GMT on March 26 -- is expected to hold steady in March and will be one of the first major sentiment surveys to be influenced by the start of the war in Iraq. A poll of 25 economists forecast on average the March index would be 88.9, the same as February, after two months of increases that sparked hopes of an end to stagnation in Europe's largest economy. In a sign of uncertainty about how Iraq war fears will affect the figures the range of forecasts was wide, spanning 87.4 to 89.6.
The majority of the 7,000 firms who participated were surveyed between March 5 and March 20, the day the U.S.-led coalition began its attack. But the Munich-based institute said it would accept responses until March 25 and economists said this could impact the final data. "High oil prices and uncertainty about Iraq will have weighed on sentiment. Nothing was certain when the survey was conducted," said Harald Joerg, an economist at Dresdner Bank, who expects the index to inch down to 88.5 points. However, other analysts said firms' speculation about a short and successful war could boost the expectations component, levelling off the overall index reading.
"It has never before been so difficult to forecast the Ifo index," said Andreas Scheuerle, an economist at DekaBank, who expects the index to inch up to 89.0. The index will follow business confidence indices from Italy and Belgium that showed war fears weighing heavily on sentiment this month. On Tuesday, research institute ISAE said business confidence in Italy fell to a seasonally-adjusted 92.8 from 93.7 in February. On Monday, Belgium's leading indicator fell to its lowest level in March since the September 11 attacks on the United States. The indicator, a survey of business sentiment that is seen as a bellwether for the euro zone, registered -16 versus -8.9 in February. Nevertheless, after the ZEW institute's expectations index, seen as foreshadowing the Ifo index, rose last week for the third straight month, economists are confident German businesses remained optimistic in March.
"There is a correlation between ZEW and Ifo so the latter should rise somewhat," said Joerg Kraemer, an economist at Invesco Asset Management. The Ifo index edged up in the first two months of this year and analysts said the European Central Bank's 25 basis point interest rate cut to 2.5 percent on March 6 and Chancellor Gerhard Schroeder's reform pledges could have helped buoy sentiment in March.
UPTURN ROUND THE CORNER?
It is a widely accepted rule of thumb that three consecutive increases in the Ifo index signals an economic turnaround, but Germany may still have to wait some time for growth to bounce back if the war drags on. "We expect the economy to move sideways in the first half and a question marks hangs over a recovery in the second half, although if the Iraq conflict is resolved swiftly, there's a good chance of an upturn then," said Joerg. Germany is counting on a global economic upturn that will drive up exports to boost flagging growth. The economy expanded by just 0.2 percent in 2002, mainly driven by exports while domestic demand idled. Many leading institutes say growth will not improve much this year. Ifo President Hans-Werner Sinn has previously warned a prolonged conflict would hit the global economy and crimp German GDP growth to 0.2 percent this year, but he said a short war would not endanger recovery.
"Assuming war is over quickly, which implies no further oil price rises and no political destabilisation in the Middle East, we expect the economic situation to get easier," he wrote in a newspaper commentary last week.//