Positive Signs for German Business Prospects Raise Hopes of Economic Rebound

26 Oct, 2023

Positive Signs for German Business Prospects Raise Hopes of Economic Rebound

Germany's business outlook has taken a slight upturn, providing some hope for a modest rebound in Europe's largest economy, even as it grapples with the looming prospect of a second recession in just over a year. According to an expectations index released by the Ifo Institute, the reading for October reached 84.7, up from a revised 83.1 in the previous month. This exceeded the median estimate in a Bloomberg survey, which had anticipated an increase to 83.5. Interestingly, there was an unexpected advancement in the measure of current conditions.

Ifo President Clemens Fuest, in an interview with Bloomberg Television, commented on the findings, stating, "What we see here does suggest that we see a certain stabilization. The German economy will be shrinking this year, but for the final quarter, we do expect a stabilization and slight growth."

However, Germany has not recorded expansion in over a year, and economists appear less optimistic than Fuest. Many anticipate a contraction during the six months leading up to December, citing factors such as the energy crisis, diminished Chinese demand, and rising interest rates.

The pivotal manufacturing sector remains beleaguered, with chemical giant Lanxess AG recently announcing plans to reduce its workforce in Germany by 7% due to energy shortages and a decline in global demand. This follows previous redundancy announcements from BASF SE. Additionally, Volkswagen AG has adjusted its guidance, attributing the changes to cost issues and supply disruptions.

Fuest highlighted that the positive numbers are primarily emerging from the service sector, particularly areas like IT and tourism. Yet, business surveys released by S&P Global on Tuesday provided little comfort, revealing a more pronounced contraction in private-sector activity this month compared to September. Moreover, indications of labor market weaknesses have emerged, dimming what had been a bright spot.

Deeper challenges, such as the rapid aging of Germany's workforce and the necessity to diversify trading relationships away from China, suggest only a feeble expansion in the years ahead. Comparisons to the 1990s, when Germany was labeled the "sick man" of Europe, are being drawn.

Nevertheless, prominent officials, including Finance Minister Christian Lindner and Bundesbank President Joachim Nagel, have pushed back against such pessimism, expressing confidence in the ability of German industry to surmount the challenges it faces.

Fuest proposed that a more accommodating monetary policy could potentially provide a boost to the economy in 2024, adding, "There might even be room for interest-rate cuts next year, maybe in the second half of next year." However, he emphasized that he would not advise the European Central Bank (ECB) to raise rates.