Rising Business Confidence Shows German Economic Resilience Amid Industrial Recovery

Business sentiment in Germany strengthened slightly in April as companies raised their expectations though they were less upbeat regarding the current situation, results of the latest ifo survey showed Monday.

Elsewhere, the Bundesbank said in its monthly report that the German economy grew better-than-expected in the first quarter of this year due to the stronger rebound in the industrial sector, while private consumption was damped by the persistently high inflation.

The business confidence index climbed to 93.6 from a revised 93.2 in April, survey data from the ifo Institute showed. Economists had forecast a stronger reading of 94.0.

The ifo indicator rose for a sixth month in a row.

The current conditions index of the survey eased to 95.0 from 95.4 in the previous month. Economists were looking for an improvement to 96.0.

The expectations measure climbed to 92.2 from a revised 91.0 in March. Economists had forecast a score of 91.5.

“German business’s worries are abating, but the economy is still lacking dynamism,” ifo Institute President Clemens Fuest said.

Morale improved in manufacturing as optimism regarding the future rose significantly even as companies viewed the current business situation as considerably worse.

Manufacturers are set to boost production in the months ahead, the survey found. The capacity utilization increased slightly from 84.3 percent to 84.5 percent and remained above its long-term average of 83.6 percent.

Meanwhile, confidence weakened in the service sector after trending upward in the past few months. Firms assessed their current situation as slightly worse and were more pessimistic regarding the future.

Morale also weakened in the trade industry due to reasons similar to those in the services sector and many retailers were reticent about ordering goods due to poor sales performance.

In the construction sector, the business sentiment improved on the back of stronger expectations. However, firms were worried and their assessment of the current situation sank to the lowest level since December 2015.

Bundesbank expects the headlines inflation to ease in the coming months due to lower energy prices and slower growth in food prices. However, the bank said underlying price pressures are likely to remain high.

Capital Economics economist Franziska Palmas said the Ifo is a reminder that the German economy is still facing substantial headwinds from rising interest rates and depressed household incomes.

The research firm still expects the economy to remain weak in the next few months.

ING economist Carsten Brzeski said a weaker current assessment component and below-average expectations do little to take away the stagnation risk for this year.

“The drop in wholesale energy prices and the reopening of China have even fuelled a short-lived industrial renaissance,” the economist said.

ING expects the first estimate for the first quarter GDP, due on Friday, to show a positive growth figure.

While the sustained increase in the business confidence index illustrates the resilience of the biggest euro area economy, the manufacturing led rebound is likely to run out of steam soon, Brzeski said.

“The flirtation with stagnation will continue,” the economist added.

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