German business outlook improves with economic momentum building

GERMANY’S business outlook rose for a fourth month as confidence builds that the country’s economic rebound will strengthen over the rest of the year. 

An expectations gauge by the Ifo institute rose to 90.4 from a revised 89.7 the previous month – less than economists had estimated in a Bloomberg survey. A measure of current conditions fell.

“Companies were less satisfied with their current business situation, but expectations brightened,” Ifo President Clemens Fuest said on Monday (May 27) in a statement. “The manufacturing, trade, and construction sectors are recovering, although the service sector took a slight hit. Germany’s economy is working its way out of the crisis step by step.”

Europe’s biggest economy dodged a recession over the winter, thanks in part to mild weather that boosted construction and helped lift gross domestic product by 0.2 per cent in the first quarter. Other indicators show momentum building in other sectors, putting the recovery on a more solid footing. 

Private-sector activity expanded at the fastest pace in a year in May, according to surveys by S&P Global. While the pickup was again driven by buoyant services, the weakness in the crucial manufacturing industry abated.

Consumers are expected to drive a gradual revival in the coming quarters as they benefit from cooling inflation and strong wage gains. Negotiated pay jumped by more than 6 per cent in the first quarter, the Bundesbank said this week, while inflation is expected to have remained below 3 per cent in May.

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Factories may also benefit from rising exports and lower interest rates, though the latter may take time to be felt as central banks take a cautious approach to loosening monetary policy. The European Central Bank is widely expected to decide on a first rate cut in June, while the path thereafter remains unclear and investors have recently pared back bets on how much easing it’ll deliver this year.

In an interview with the Financial Times published Monday, ECB chief economist Philip Lane confirmed the intention to reduce borrowing costs next month but warned that policy would remain tight.

“The best way to frame the debate this year is that we still need to be restrictive all year long,” he said. “But within the zone of restrictiveness, we can move down somewhat.” BLOOMBERG