German Business Confidence Rises As Eurozone Crisis Slowly Abates

German business sentiment rose more than expected in December as leaders continue to show confidence in the strength of Europe's biggest economy.

The key business climate index from Munich-based Institute CESifo, built from a survey of more than 7,000 senior executives, rose to 102.4 from a reading of 101.4 in November, the second consecutive increase from the two-and-a-half year low it hit in October. The Institute's expectations index also increased to 97.9 from 95.2 in November, while the index of currenct conditions hit 107.2, slightly lower than analysts' forecasts of 108.

The single currency rose to a seven and a half month high of $1.3265 against the US dollar following the release.

Last week CESifo halved its forecast for German economic growth next year to 0.7 percent - from its June assessment of a 1.3 percent advance - citing the continued impact of the Eurozone debt crisis.

"The German economy looks set to contract in the fourth quarter of 2012, before staging a recovery that is expected to be modest initially in 2013," it said in a statement.

"If the euro crisis does not escalate and remains in line with the baseline scenario, domestic upward forces and rising demand for German export goods from outside the EU should boost the economy."

The broader economic gloom hasn't hurt financial market performance, however, as Germany's main stock market index, the DAX, continues to test five-year highs. The benchmark rose by 0.3 percent this morning to trade at 7,665.9 points, just a few points shy of the 7,7732 reached on 14 January 2008. Benchmark 10-year bond yields have fallen around 25 basis points since September to trade at 1.42 percent, the lowest in the Eurozone.

German investor confidence unexpectedly rose to a seven-month high on 11 December even as Europe's sovereign debt crisis continues to take its toll on the region's most important economy, the country's ZEW Centre for European Economic Research in Mahhheim said. Its key index of investor and analyst expectations for the economy rose to 6.9 points in December from a reading of -15.7 points in November. It is the first positive reading for the benchmark index since May.

The index of current conditions also advanced, although marginally, to 5.7 points from 5.4 points in the previous month.

"The indicator's rise shows that the financial market experts expect the economic activity to stabilize until early summer 2013" the ZEW said in its release. "Positive U.S. economic data may have contributed to this assessment. They may have spurred the hope that the global economy will gain momentum."

Manufacturing activity in Germany - the bulk of the strength of Europe's largest economy - slumped to 46.3 from a November reading of 46.8, according to data provider Markit.

The disappointing figure, however, may have been offset by the first expansion of its services sector (to a robust 52.1 from 49.7 in November). Whether this will mean Germany will manage to avoid recession by recording flat or modest growth in the final three months of this year remains to be seen.