German business outlook improves for first time since Iran war

[BERLIN] Germany’s business outlook improved for the first time since fighting broke out in the Middle East, demonstrating some resilience to the war for Europe’s biggest economy.

An expectations index by German think tank Ifo institute rose to 83.8 in May from a revised 83.5 the previous month.

That is a little higher than the median estimate in a Bloomberg survey of economists.

It is also the first positive turn in three months.

A gauge measuring current conditions unexpectedly increased.

On Friday (May 22), Ifo president Clemens Fuest said: “The German economy is stabilising for the time being, although the situation remains fragile.

“Expectations for the coming months are also less pessimistic.”

Germany starting to experience economic drag

Germany, like the rest of Europe, is starting to experience a drag on its economy, as the Iran war feeds inflation and saps confidence among households and companies.

The government has already halved the growth forecast in 2026, and business surveys this week showed private-sector activity shrinking for a second straight month in May.

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Separate data on Friday showed a surge in exports and higher government spending offset flat consumer demand and a drop in investment to ensure first-quarter expansion of 0.3 per cent, matching an earlier estimate. 

The numbers offer a small reprieve for German Chancellor Friedrich Merz, who has faced pressure to rekindle growth through comprehensive reforms.

The economy has not seen meaningful expansion in three years, with government infighting not helping its chances of improving.

Carsten Brzeski, global head of macro at ING, warned that trade will not be able to repeat the strong performance, and companies will probably hold on to higher inventory levels.

He added that private consumption is unlikely to recover, and higher interest rates will hamper activity in the construction sector.

“This leaves the public sector as the only possible source of growth in the second quarter,” he noted, saying that it is “not a very promising outlook”.

With the Bundesbank predicting stagnation this quarter, some companies are already gloomy.

German tech conglomerate Thyssenkrupp has trimmed its sales outlook, forecasting flat annual revenue at best.

Volkswagen, which was already weighed down by tariffs, Chinese competition and sagging demand, experienced a decline in its first-quarter operating margin. 

Others remain optimistic that things can get better.

BMW expects demand in China to stabilise and US President Donald Trump to backpedal from his latest threat to raise tariffs on European cars.

Siemens, meanwhile, announced it will repurchase as much as six billion euros (S$8.9 billion) of shares after orders climbed.

Lavish government spending on infrastructure and defence is also acting as a cushion. BLOOMBERG