Ifo index rises for the fourth time in a row

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The mood in the German economy improved again at the beginning of the year. The Ifo business climate rose in January for the fourth time in a row. Economists nevertheless warn against too much optimism.

The mood in the executive floors of German companies has brightened for the fourth month in a row since the turn of the year. The Ifo business climate index rose in January to 90.2 points from 88.6 points in the previous month, as the Munich Ifo Institute announced on Wednesday in its survey of around 9,000 executives. However, companies were less satisfied with current business than in December, while expectations for the next six months increased. “The German economy is starting the new year with more confidence,” said Ifo President Clemens Fuest.

With a view to the economic outlook, it will probably be far less bad than the executives initially feared, says chief economist Alexander Krüger from Hauck Aufhäuser Lampe Privatbank: “The risk of a recession is becoming ever smaller.” According to the latest S&P Global Purchasing Managers' Index, the economy in this country is looking towards growth again. Germany could thus be spared a winter recession, since the gross domestic product from October to December 2022 stagnated compared to the previous quarter according to preliminary findings from the Federal Statistical Office.

The federal government is also not expecting a recession in its upcoming annual economic report. As the Reuters news agency learned from insiders, it now expects growth of 0.2 percent in 2023, after a minus of 0.4 percent was estimated in October. 

Improved mood across the sectors

In the manufacturing sector, both the assessment of the current situation and the expectations for the coming months have improved, as the Ifo also announced. The orders are being processed accordingly, but the order backlog is still at a high level. Production should therefore increase in the coming months.

Logistics industry: expectations better than current business

In the service sector, expectations improved in particular. Current business, on the other hand, is developing “less well,” the institute said. This applies above all to the transport and logistics sectors as well as to the hospitality industry.

In retail, expectations have also increased. But the companies continue to rate the current situation as “slightly positive”, explained the Ifo.

The business climate has also improved “slightly” in the construction industry. The companies are a little less satisfied with the current business than in December. However, their expectations for the coming months are “slightly less pessimistic”.

Competitiveness comes to the fore

“The winter crisis will probably still not take place. Instead, the discussion will focus more and more on the long-term competitiveness of Germany as a business location. In Germany, there is a great need for reform in the framework conditions for companies,” commented Ulrich Kater, Chief Economist at Dekabank. the ifo data.

For the chief economist at Commerzbank, Jörg Krämer, the danger of a recession has not yet been completely averted. “The Ifo business climate has recovered significantly as the easing in the gas market further reduced companies' fears of a severe recession. But the Ifo business climate is still at a level where recessions have regularly occurred in the past. In addition, the central banks in many countries had to massively raise their key interest rates due to high inflation. A mild recession remains the more likely scenario.”

For Alexander Krüger from Bankhaus Hauck Aufhäuser Lampe, there is still a “high risk of setbacks due to the respective corona Location in China.”

Jens-Oliver Niklasch from LBBW is also putting the brakes on the euphoria: “You shouldn't get too optimistic too quickly just because the feared crash didn't materialize. Apparently one or the other company is having growing difficulties with the triad of high energy prices and disrupted supply chains and rising interest rates. Perhaps the drop in new orders in the second half of the year is already making itself felt.”

High energy and food prices depress private consumption

Private consumption lower

According to a forecast by the Ifo Institute, the German economy will contract in the first quarter despite the significantly improved economic expectations. “Gross domestic product is likely to fall slightly,” Klaus Wohlrabe, head of the Ifo surveys, told the Reuters news agency on Wednesday. “This is mainly due to private consumption.” It should be lower from January to March than at the end of 2022 – also because of pull-forward effects.

In December, for example, a large number of electric cars were sold because buyers still want to benefit from the state bonus. “This demand is now missing,” said Wohlrabe. In addition, many consumers would have to pay significantly more for electricity and gas from the beginning of the year. “There is no money for other expenses.”

But the Ifo expert does not see a classic recession – which economists define as two negative quarters in a row – coming to Europe's largest economy. “The economy is likely to grow again in the spring,” he said. Less than every second company complained about delivery bottlenecks in January. “In addition, the order books of the industrial companies are still very full,” said Wohlrabe. Their range is just under five months, while the long-term average is less than three. “This creates room for production increases in the coming months,” said Wohlrabe.

tko/hb (rtr, afp)