German economy 'sees light on the horizon'

The German economy's first-quarter recession slowed down as business confidence indicators increased beyond forecasts, compared to 'spring awakening'.

Ifo Institute - Germany's leading economic research institute headquartered in Munich - has just announced that the country's March Business Climate Index increased from 85.7 in February to 87.8. This result exceeded the forecast of 86 according to the Wall Street Journal 's survey of economists .

"The German economy sees a glimpse of light on the horizon," assessed Clemens Fuest, President of the Ifo Institute. Joerg Kraemer, Chief Economist at Commerzbank, said the strong rise in Ifo's business climate index "gives us hope". According to him, the impact of rising interest rates and energy prices is starting to subside.

Previously, the ZEW Economic Research Institute also said that German investor morale improved more than expected in March, thanks to expectations of the ECB cutting interest rates and positive signs from China.

The economic sentiment index surveyed by ZEW increased to 31.7 points, from 19.9 in February. The March result also exceeded analysts' forecasts in a Reuters poll at 20.5 .

Workers work at the BMW Group factory in Munich on December 5, 2023. Photo: Reuters

ZEW President Achim Wambach said more than 80% of people surveyed predict the ECB will cut interest rates in the next six months. This brings a more optimistic outlook for the construction industry. "Germany's export sector benefits from growing economic expectations with China, as well as an expected strengthening of the euro against the USD," he added.

Data released last week showed that China's industrial production and retail sales both exceeded forecasts in the first two months of the year. Along with that, recent exports and consumer inflation have also been better than expected.

According to Thomas Gitze, Chief Economist of VP Bank (headquartered in Liechtenstein, a small country bordering Germany), this is positive information for Europe's largest economy, bringing hope for improvement in the summer months. "The German economy is accelerating, one could even call it a spring awakening," he said.

Germany is predicted to continue to decline in the first quarter of this year, after the economy shrank by 0.3% in the fourth quarter of 2023. The recession eased slightly in March thanks to stable services sector activity, according to S&P Global's Purchasing Managers' Index (PMI).

"The improving signal in March is the first step to a more sustainable growth in both surveys (PMI and Ifo survey)," said Claus Vistesen, Chief Eurozone Economist at Pantheon Macro Economics, Evaluate.

However, experts also caution against confusing the end of the recession with a real recovery. "Before looking at the recovery, let's not forget that today's figures are still much lower than the levels reached last summer," warned Carsten Brzeski, ING's global head of macro.

In 2023, German GDP contracted by 0.3%, making it the worst-performing major economy. The German government believes that this year's economy will only grow by 0.2% because it cannot expect much given weak global demand, geopolitical instability and persistent high inflation.

"Even if business sentiment indicators have improved slightly, it seems likely that any recovery in the German economy this year will be weak," Brzeski said.