(Bloomberg) — Germany’s business outlook rose for a fourth straight month on growing confidence that the country’s economic recovery will strengthen through the rest of the year.
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The Ifo Institute for Economic Research’s expectations index rose to 90.4 from a revised 89.7 in the previous month, below expectations of economists in a Bloomberg survey, while a gauge of current conditions fell, according to a statement released on Monday.
“We’re not yet fully recovered,” Ifo President Clemens Fuest told Bloomberg Television. “The German economy is improving, but slowly,” he said, pointing to improving performances in manufacturing and construction.
Germany, Europe’s largest economy, avoided a winter recession thanks in part to mild weather that boosted construction, helping to lift first-quarter gross domestic product by 0.2%. Other indicators point to gaining momentum in other sectors, putting the recovery on firmer footing.
Private sector activity expanded at the fastest pace in a year in May, according to a survey by S&P Global, with the recovery again driven by strength in the services sector while weakness in key manufacturing eased.
Consumers are expected to drive a gradual economic recovery in coming quarters, benefiting from subdued inflation and stronger wage gains. Germany’s Bundesbank said this week that negotiated wages rose more than 6% in the first quarter, while inflation is expected to fall below 3% in May.
Bloomberg Economics reports…
“Recent survey data suggests that the road to recovery for the German economy remains long and difficult. Overall, the unchanged Ifo business sentiment index for May and rising PMI indicators support our view of an economic recovery in the second half of the year, although economic activity may remain weak in the current quarter.”
—Martin Ademar, Economist. Click here for the full REACT article
“Personal consumption is somewhat puzzling because disposable income is improving but households appear to be saving more,” Fuest said. “What we’re hoping for is improved consumer demand this year, but that’s not going to happen anytime soon.”
Factories could benefit from rising exports and lower interest rates, but the declines may take time to be felt as central banks remain cautious about easing monetary policy. The European Central Bank is widely expected to cut interest rates for the first time in June, but the path beyond that remains unclear, and investors have recently scaled back bets on how much easing will be implemented this year.
In an interview with the Financial Times published on Monday, ECB chief economist Philip Lane confirmed the bank’s intention to cut borrowing costs next month amid slowing inflation and wage growth, but warned that policy would remain tight.
“The best way to frame the discussion this year is that we still need to be restrictive throughout the year,” he said, “but we can ease up some within the limits of the restrictions.”
Fust said wage pressures will continue as the labor market remains tight.
“Part of the answer is higher wages, which is an inflationary risk, but at the same time, we need higher wages to allow workers to go to where they’re most productive,” he said. “That’s going to be a challenge for monetary policy, so I think we’re going to see interest rates stay higher for a while longer.”
—With assistance from Joel Rinneby and Kristian Siedenburg.
(Updates with Bloomberg Economics from the sixth paragraph onwards.)
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