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German business outlook improves as economic momentum builds
(Bloomberg) — Germany’s business outlook rose for a fourth month as confidence grows that the country’s economic recovery will strengthen over the rest of the year.
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An expectations gauge from the Ifo institute rose to 90.4 from a revised 89.7 the previous month – lower than economists had estimated in a Bloomberg survey. A measure of current conditions has fallen, according to a statement published Monday.
“It’s not a full recovery yet,” Ifo President Clemens Fuest told Bloomberg Television. “The German economy is improving, but slowly,” he said, noting better performances in manufacturing and construction.
Europe’s largest economy avoided a recession over the winter, thanks in part to mild weather that boosted construction and helped lift gross domestic product by 0.2% in the first quarter. Other indicators show growing momentum 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 recovery was again driven by buoyancy in services, weakness in crucial manufacturing eased.
Consumers are expected to drive a gradual recovery in the coming quarters as they benefit from cooling inflation and strong wage gains. Negotiated wages increased by more than 6% in the first quarter, the Bundesbank said this week, while inflation is expected to have remained below 3% in May.
What Bloomberg Economic says…
“Recent survey data suggests that the road to recovery for the German economy will continue to be long and bumpy. Overall, May’s unchanged Ifo business climate reading and higher PMI indicator support our view of stronger momentum in the second half of the year, while activity in the current quarter may still be subdued.”
—Martin Ademmer, economist. Click here for full REACT
“Private consumption is, to some extent, an enigma because we see that disposable incomes are improving,” but families appear to be saving more, Fuest said. “What we expect is an improvement in consumer demand this year. It’s simply not available.
Factories could also benefit from increased exports and lower interest rates, although the latter may take some time to be felt as central banks take a cautious approach to easing monetary policy. The European Central Bank is expected to decide on a first rate cut in June, although the path forward remains uncertain and investors have recently scaled back bets on the level of easing it will provide this year.
The story continues
In an interview with the Financial Times published on Monday, ECB chief economist Philip Lane confirmed the intention to reduce borrowing costs next month as inflation and wage growth decline, but warned that the policy would remain restrictive.
“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 restrictive zone we can go down a little.”
Fuest said wage pressures will remain as labor markets remain tight.
“One answer to this is raises – this is a risk to inflation and at the same time we need these wage increases to ensure that workers go where they are most productive,” he said. “This will be a challenge for monetary policy. So I think maybe rates will stay high for longer.”
–With assistance from Joel Rinneby and Kristian Siedenburg.
(Updates with Bloomberg Economics after sixth paragraph.)
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