The financial sphere successfully halted its downward spiral momentarily.
There appears to be a sliver of positivity pervading German corporate boardrooms, albeit modestly and temporarily. Nevertheless, experts are cautioning against overly optimistic forecasts. A substantial upswing is not imminent, and the unpredictable US election adds another layer of uncertainty.
In an unexpected turn of events, executives in October reported a noticeable improvement in the German economy's situation. According to Ifo President Clemens Fuest, "The German economy has managed to halt its decline thus far." Industries, services, and retail sectors have seen an improvement, whereas the construction sector has once again faced a downturn.
Reflecting this improvement, the Ifo Business Climate Index, a key indicator for the German economy, rose from 85.4 to 86.5 points, as disclosed by the Munich Ifo Institute following its survey of around 9,000 business leaders. Companies showed a more optimistic outlook towards their current situation as well as the future prospects. This marks the first increase following four consecutive declines. Economists had anticipated a marginally higher score of 85.6 points.
Survey director Klaus Wohlrabe, however, is far from cheerful, pointing out that "it's still premature to expect any clear sign of improvement." The potential election of Donald Trump as US president could bring about another wave of pessimism in November. Around 44 percent of German industrial companies anticipate facing negative consequences if Trump, a Republican, defeats Kamala Harris, a Democrat. Wohlrabe also emphasized the ongoing issue of lacking orders.
Bank economists, too, have counseled against excessive optimism. Commerzbank's chief economist Jörg Krämer stated, "The winter half-year is likely to be challenging for the German economy." Nevertheless, the current improvement in the Ifo Business Climate Index hints at averse conditions for a deep recession. Krämer concluded, "Considering the inaction of the federal government against the ongoing erosion of the location quality, a stagnant winter half-year is more plausible, followed by a weak recovery in the spring."
The Bundesbank does not envision the European Union's largest economy breaking free from its chronic economic slump before the year's end. Observing the current state, economic activity in the fourth quarter is likely to remain stagnant, it declared in their latest monthly report. In the summer quarter, GDP likely varied only slightly, having shrunk by 0.1 percent in the spring quarter. Two consecutive negative quarters would indicate a technical recession.
Even though a significant, prolonged, and widespread economic downturn is not anticipated for the German economy at the moment, it remains trapped in a weakening phase that has persisted since mid-2022, as per the Bundesbank's assessment. The International Monetary Fund (IMF) predicts that Germany will experience no growth this year and a 0.8 percent increase in 2025. Other major industrialized nations have managed to outperform Germany, the IMF reported, attributing this to persistent difficulties in industry and problems with the real estate market.
Given the improving economic situation in Germany, as evidenced by the rise in the Ifo Business Climate Index, the Commission has acknowledged this change, stating, "We have taken note of the uptick in the German economy as indicated by the Ifo Business Climate Index." Despite this development, the Commission remains cautious, emphasizing, "It is important to maintain a balanced and realistic outlook given the various uncertainties ahead, including the US election results."
