Germany’s business confidence improved further as expected at the start of the year to the strongest level in seven months, as companies were considerably less pessimistic about the future, although they were slightly less satisfied with the current situation, survey results from the Munich-based ifo Institute showed on Wednesday.
The ifo business confidence index rose to 90.2 in January from 88.6 in December. That was in line with economists’ forecasts.
The index has been rising since October and the latest score was the highest since June last year, when it was 92.3.
Thus, the German economy started the new year with more confidence amid a less pessimistic production outlook, but companies were somewhat less satisfied with their current situation, President of the ifo Institute Clemens Fuest said.
“Overall, the reading confirms that the German economy has avoided the deep downturn that many, including us, had anticipated at the onset of the energy crisis,” Franziska Palmas, a senior economist at Capital Economics, said.
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The recent measures taken by the Chinese government to reopen boundaries after lifting the Covid pandemic restrictions, coupled with lower wholesale gas prices have boosted economic confidence in Germany.
The index measuring business expectations increased from 83.2 to 86.4. Economists were looking for a score of 85.0.
Meanwhile, the current conditions indicator dropped slightly to 94.1 in January from 94.4 in December. Economists had forecast a reading of 95.0.
Among sectors, the ifo business climate index for the manufacturing sector continued to maintain its rising trajectory in January.
Manufacturing firms assessed their current situation as better, and their production expectations in the next 6 months improved noticeably. Despite showing a falling trend, orders volumes remained at a high level.
Data also showed that the business climate indicator for the service sector strengthened, as firms were less pessimistic about the coming months, but they were unhappier with the current business, especially in the transport, logistics, and hospitality segments.
The latest purchasing managers’ survey, conducted by S&P Global, showed that Germany’s private sector downturn softened to a stable footing at the start of the year amid a moderation in price pressures. A renewed positive outlook due to the easing recession fears and the ongoing strength in the job market also underpinned activity in January.
Business morale in the trade sector showed strong positive momentum in January, thanks to their noticeably higher expectations along with current better conditions, the ifo survey showed.
At the same time, the index for construction rose marginally to -21.6 from -21.9 amid an improvement in expectations, despite a slight fall in the assessment of present conditions.
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The German economy is still facing a series of structural challenges which are likely to weigh on growth this year and beyond, ING economist Carsten Brzeski said.
These include energy supply in the winter of 2023/24 and the broader energy transition towards renewables, changing global trade with more geopolitical risks and changes to supply chains, high investment needs for digitalisation and infrastructure, and an increasing lack of skilled workers.
And, like every eurozone economy, the German economy still has to digest the full impact of the ECB rate hikes, Brzeski noted.
“In short, the German economy will still be highly affected by last year’s crises throughout 2023,” the economist added.
In contrast to the hard economic data, the ifo business climate indicates that a recession is imminent as the index is still at a level at which GDP has usually contracted for at least two quarters in succession in the past, Commerzbank Chief Economist Jorg Kramer said.
“All in all, a mild recession remains the more likely scenario,” the economist said. Commerzbank expects German GDP to decline by 0.5 percent on average this year.