Brandenburg Gate in Berlin, Germany

Germany Business Confidence March 2019

Germany: Business confidence improved for the first time in seven months, but remained in pessimistic territory

After free-falling since September last year, business sentiment showed signs of recovering: The Ifo business climate index increased to 99.6 in March from 98.7 in February, which had marked the lowest reading in nearly two years. The headline reading edged up on improved outlooks on both the current and expected business climate but the index remained stuck in pessimistic territory nonetheless.

Sector-level data showed a somewhat mixed picture and followed in the footsteps of disappointing data on the manufacturing sector. Sentiment among firms in the services; trade; and construction industries improved. Service provides were more optimistic regarding the current business climate and business expectations in the next six months, while companies in the trade sector also became more optimistic in their assessments of the expected and current business climate—this came largely on the back of retailers reporting ‘a very good current situation’. In fact, unemployment has remained at a post-unification low; wages continued to rise; and sentiment among consumers remained firmly optimistic, all boding well for household expenditure. Meanwhile, views on the current climate improved among construction firms but their assessment of the next six months remained unchanged.

The manufacturing sector is the clear outlier, as sentiment regarding both the current climate and business expectations continued to deteriorate. Business expectations fell to their lowest level since November 2012 on declining demand. This follows other data corroborating the story: Industrial output fell in January and PMI data showed that the downturn in the sector intensified in March.

Regarding the ongoing downturn in the manufacturing sector, Carsten Brzeski, chief Germany economist at ING, stated that it is “needless to say that cars play an important role in this development. The manufacturing sector has been on a downward trend since last August, dragging the entire economy down. […] The German economy is currently the best example of how a fundamentally solid economy, with admittedly some structural flaws, can be brought to its knees by risks and certainties.” Moreover, the headline figure provides for some relief and evidence for a rebound according to Brzeski.

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