ifo Business Climate: Confidence in the economy is growing

At the beginning of the year, the mood in the executive floors of German companies brightened for the fourth month in a row. While expectations were better, companies were less satisfied with current business.

At the turn of the year, the mood in the German economy improved for the fourth time in a row. The ifo business climate rose in January to 90.2 points from 88.6 points in the previous month, as the Munich Institute announced today. Bank economists and economists had expected an increase of this magnitude on average. “The German economy is starting the new year with more confidence,” said ifo President Clemens Fuest. While the companies rated their future prospects significantly better, they assessed their current situation somewhat worse.

The federal government is also more optimistic

“The ifo business climate has recovered significantly because the easing on the gas market further reduced companies’ fears of a severe recession,” commented Jörg Krämer, chief economist at Commerzbank. However, it is still at a level at which there have been regular economic downturns in the past. In addition, the central banks in many countries had to raise their key interest rates massively because of the high inflation. According to Krämer, a mild recession is still “the more likely scenario”.

“The fourth rise in the index in a row strengthens the prospect of a trend reversal,” agrees Alexander Krüger from Bankhaus Hauck Aufhäuser Lampe. Economically, it seems to be far less bad than feared. “The risk of a recession is getting smaller and smaller.” This was also recently shown by other leading indicators and economic data. For example, the S&P Global Purchasing Managers Index in Germany recently rose for the third month in a row.

According to preliminary information, gross domestic product (GDP) stagnated from October to December 2022 compared to the previous quarter. In its new annual economic report, the federal government no longer expects a recession either. Accordingly, in 2023 she now expects a mini-growth of 0.2 percent, after a minus of 0.4 percent had been estimated in October. Federal Economics Minister Robert Habeck will present the report in Berlin this afternoon.

Economy could contract in first quarter

According to the ifo survey, the mood among companies improved in all sectors surveyed – in manufacturing, in the service sector, in trade and also in the construction industry. Last year, the business climate mostly clouded over by late summer. The triggers were the Russian war of aggression against Ukraine and the sharp rise in energy prices. However, the latter have fallen significantly in recent weeks.

Nevertheless, pessimism continues to prevail among the companies surveyed in the current situation, warns economist Krüger. Energy costs and material bottlenecks are still challenging. Jens-Oliver Niklasch from Landesbank Baden-Württemberg also points this out: “You shouldn’t get too optimistic too quickly.” Apparently, one or the other company is having growing difficulties with the triad of high energy prices, disrupted supply chains and rising interest rates. Added to this is the thinning cushion of orders in German industry.

Irrespective of the clearly brightened economic expectations, the German economy will also shrink in the first quarter of the new year, according to the ifo Institute’s forecast. “Gross domestic product is likely to fall slightly,” said Klaus Wohlrabe, head of the ifo surveys. “This is mainly due to private consumption.” This should be lower from January to March than at the end of 2022 – also because of so-called pull-forward effects. For example, a large number of electric cars were sold in December because buyers still wanted to benefit from the state bonus. “This demand is now missing,” said Wohlrabe. In addition, many consumers would have to pay significantly more for electricity and gas from the beginning of the year. “There is no money for other expenses.”