The Institute for Economic Research’s (ifo) business climate for Germany reached the highest level this month for more than two years and beat the analysts’ expectations markedly.
And despite recent weakness in German export and production data, the positive results of the ifo survey shows the German company sector to be resilient against weaker global trends.
On the back of the latest data, Coface, a global leader in credit insurance and risk management, forecasts a robust growth rate of 1.8% this year. And a similar growth rate is expected next year, with Coface predicting 1.7%.
However, Coface warns there are still risks that could worsen the outlook for the German economy.
According to the ifo’s business climate survey, the German economy rose by an unexpected 3.2 points to a level of 109.5 points. This is far above the long-term average of 100 points and indicates – according to ifo’s economic clock – an economic boom.
After two setbacks in a row, ifo expectations soared with an increase of 4.4 points to 104.5 – the highest level since almost a year.Current economic conditions were also evaluated more positively and reached a very high level of 114.7 points again.
Significant improvement in manufacturing sector
In all sectors, current conditions and expectations are seen more positive by German companies.
The most significant improvement was reported for expectations in the manufacturing sector.
With a strong increase of 10.8 points, business expectations became positive again for the first time since the end of last year.
According to ifo, this was the strongest increase since shortly after the financial and economic crisis.
Ifo’s results were surprising since recent “hard data” was showing some weakness for the German economy.
In July, exports collapsed by 10 percent year-over year – the strongest setback since 2009.
And manufacturing production was also disappointing as well in recent months, showing a high degree of volatility.
Coface says uncertainties in the global environment will continue weighing on German export businesses, although the recent collapse in exports should not repeat in the foreseeable future.
In particular, political risks could be a significant drag on those companies.
Coming elections in Spain, France and also for the German Bundestag next year could increase political uncertainty further.
And Brexit could also have an impact, as the UK is Germany’s fifth most important trading partner.
Higher inflation rates
The higher political uncertainty could dampen the currently strong growth in private consumption – especially if it were in conjunction with a weaker performance in the labour market and lower real wage growth.
The unemployment rate will probably not decrease further, says Coface, but may go up slightly with the integration of refugees in the labour market.
Further, slightly higher inflation rates will prevent real wages from growing even stronger.
These two impacts could weigh on private households sentiment stronger than currently expected and therefore have the potential to weigh on GDP growth as well.
Coface’s country risk assessment for Germany remains at A1 (very low).