Sentiment in the German economy continues to improve


Sentiment in the German economy improved in March despite the recent turbulence in the banking sector. The Ifo business climate index unexpectedly improved for the fifth month in a row.

The mood in the executive floors of German companies surprisingly brightened in March for the fifth month in a row. The Ifo business climate index rose to 93.3 points from 91.1 points in the previous month, as the Munich Ifo Institute announced on Monday in its survey of around 9,000 executives. Economists surveyed by the Reuters news agency, on the other hand, had expected a slight decline to 91.0 points. “Despite the turbulence at some international banks, the German economy is stabilizing,” said Ifo President Clemens Fuest. Companies were somewhat happier with current business than in February. And the expectations for the next six months increased significantly.

The business climate brightened across the board – even in the construction industry, which was badly hit by higher mortgage costs as a result of the interest rate turnaround.

“The German economy is starting spring “with a good feeling,” said Ifo expert Klaus Wohlrabe, adding: “A winter recession has become less likely.” In the fourth quarter of 2022, Europe's largest economy had shrunk by 0.4 percent With two negative quarters in a row, experts speak of a technical recession.

Banking problems are not a burden for the time being

“The banking problems leave the companies cold. The mood of the companies rose, regardless of whether they knew about the events surrounding Credit Suisse and Co. or not,” says economist Andreas Scheuerle from Dekabank. Nevertheless, it is to be expected that the banks would react to the current events by tightening their lending conditions: “And that will throw a spanner in the works.”

The key question for the German economy too: how quickly will China recover?

At the moment, however, things are going better than expected: According to the Ifo, the mood in the manufacturing sector has even improved significantly, while the upward trend in the business climate in the service sector has continued. “The renewed strong increase in the Ifo business climate undoubtedly improves the prospects for the second quarter,” says Commerzbank chief economist Jörg Krämer. But the ECB's rate hikes since July last year took effect with a time lag of at least four quarters and argue against an economic recovery in the second half of the year.

The Ifo researchers are also relatively pessimistic about the economy this year. Unlike the other leading institutes and economic experts, they do not anticipate slight growth in gross domestic product, but rather a decline of 0.1 percent. Most recently, however, the purchasing manager barometer from the financial service provider S&P had signaled that the economy in Germany had started spring with momentum. In March it stayed above the growth threshold of 50 points for the second month in a row.

The mood in the construction industry is also brightening slightly

Economists see light and shadow

“Expectations are creeping up, but they're not yet exuding confidence,” says Alexander Krüger, chief economist at private bank Hauck Aufhäuser Lampe, commenting on the Ifo numbers. “All in all, the business climate has so far not been based on more than the principle of hope. Especially since impulses from China have recently become more uncertain. The interest rate hikes, which only took effect with a time lag, are also having a negative impact on the outlook for the second half of the year. There is still no sign of a real upswing for 2023. “

Jens-Oliver Niklasch from Landesbank Baden-Württemberg (LBBW) assesses the current data on the business climate as positive, but with slight drawbacks when looking at the year as a whole. “That's encouraging, albeit a bit unexpected. The various leading indicators are currently developing quite differently. However, today's numbers on the business climate underline that the industrial economy has regained something of an inner strength, fed by a good order situation and the more robust supply chains. Probably exports and investment in equipment will develop better than private consumption this year.” Nevertheless, LBBW remains cautious when it comes to the overall economic result for 2023. “There are currently too many downside risks,” says Niklasch.

tko/hb (rtr, dpa)