May 30, 2024

Optimism returns to Germany as the Ifo jumps again | snaps

The cycle has started to turn for the better. Today’s Ifo index provides further evidence of a bottoming out of the German economy. Hard data for the first two months of the quarter already suggested it could have left recession behind earlier than expected. Strong activity in the construction sector on the back of mild winter weather and a technical rebound in trade and industrial production should have offset still weak private consumption. This cyclical upswing looks set to continue in the second quarter. 

However, let’s not forget that several cyclical factors are still dragging down economic activity. Higher oil prices as a result of the military conflict between Iran and Israel, as well as the ongoing tensions in the Red Sea, are likely to weigh on industry and exports once again. Also, the increasing number of insolvencies and individual company announcements of upcoming job restructurings fuel the risk of a weakening labour market this year. Finally, besides the potential cyclical headwinds, Germany’s well-known structural weaknesses will not disappear overnight and will limit the speed of any rebound this year.

All in all, today’s Ifo index brings back more optimism for the German economy. The cyclical trough is behind us, but this doesn’t necessarily mean that a strong recovery is imminent as structural weaknesses remain. A new risk of this cyclical improvement could be that it gives rise to policy complacency.

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