Mixed signals in Germany

GERMAN economic data gave off conflicting signals yesterday, as markets reacted positively to a better-than-expected slowdown in M3 money supply growth, while a jump in producer prices heightened inflation sensitivity.

August M3 grew at an annualised rate of 8.2 per cent, down from 9.8 per cent in July. Johann Wilhelm Gaddum, deputy president of the Bundesbank, said: 'We are in a thoroughly pleasing trend.'

A relieved German bond futures market, which had plunged to new contract lows on Tuesday amid rumours of poor M3 data, bounced back strongly. But economists said the figure needed to treated with some scepticism.

Producer prices, which rose 0.2 per cent in August from July, and 0.7 per cent year-on-year, were worse than expected. 'The market is still worried about underlying inflation pressures,' said Richard Reid of UBS in Frankfurt.

Surveys of firms show clear signs of a desire to push through higher prices. 'The inflation trend is a bit disappointing at the producer/wholesale end,' said Stefan Schneider of SG Warburg in Frankfurt. 'That can only strengthen the Bundesbank's already big reluctance to take risks by easing rates.'

The falling M3 encouraged those economists who believe another small cut in key rates is possible. Others are convinced the chances of this happening are minimal, given the strength of the recovery.

Gunter Rexrodt, the Economics Minister, yesterday raised the forecast of German economic growth this year to 2.5 per cent. But BDI, the German industry federation, said Germany had swung too rapidly from deep pessimism about its economic future to exaggerated optimism.