The German economy starts the new year with confidence

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Status: 01/25/2023 11:22 AM

At the beginning of the year, the mood on the executive floors of German companies improved for the fourth month in a row. While the outlook was better, the companies were less satisfied with the 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 in January rose to 90.2 points from 88.6 points in the previous month, the Munich Institute announced today. Bank economists and economists expected an increase of this size on average. “The German economy starts the new year with more confidence,” said IFO President Clemens Fuest. While companies rated their future prospects much better, they rated their current situation somewhat worse.

Clemens Fuest, President of the ifo institute, on the mood in the German economy

tagesschau24 11:00 AM, 1/25/2023

The federal government is also more optimistic

“The business climate at IFO has recovered significantly because easing in the gas market has reduced companies’ fears of a severe recession,” commented Jörg Kramer, chief economist at Commerzbank. However, it is still at a level where there have been regular economic slowdowns in the past. In addition, the central banks of many countries have had to significantly raise key interest rates due to high inflation. According to Kramer, a mild recession is still the “most likely scenario.”

Alexander Krueger of Bankhaus Hauck Aufhäuser Lampe agrees, “The fourth consecutive rise in the index enhances the likelihood of a trend reversal.” Economically, it appears to be less bad than feared. “The risk of a recession is getting smaller and smaller.” This has also been shown recently by other leading economic indicators and data. For example, Germany’s S&P Global Buying Managers Index recently rose for the third month in a row.

According to preliminary information, the gross domestic product stagnated during the period from October to December 2022 compared to the previous quarter. In its new annual economic report, the federal government no longer predicts a recession, either. Accordingly, it now expects in 2023 a small growth of 0.2 percent, after an estimate of minus 0.4 percent in October. Federal Economics Minister Robert Habeck will present the report in Berlin this afternoon.

The economy could contract in the first quarter

According to the ifo survey, the mood has improved among companies in all sectors surveyed – in manufacturing, the service sector, trade, and also in the construction industry. Last year, the business climate mostly clouded over by late summer. The impetus for this was Russia’s war of aggression against Ukraine and the sharp rise in energy prices. However, the latter has decreased significantly in recent weeks.

However, pessimism still prevails among the companies surveyed in the current situation, economist Krueger warns. Energy costs and material bottlenecks remain a challenge. Jens-Oliver Niklasch of Landesbank Baden-Württemberg also points out this: “You don’t have to be optimistic too quickly.” Apparently, one other company is facing increasing difficulties with the trinity of soaring energy prices, broken supply chains, and rising interest rates. Added to this is the cushion of light orders in German industry.

Regardless of the clearly bright economic outlook, the German economy will also contract in the first quarter of the new year, according to ifo institute forecasts. “Gross domestic product is likely to decline slightly,” said Klaus Wollrabe, head of IFO polls. ‘This is mainly due to private consumption.’ This should be lower in January-March than it was at the end of 2022 – also because of the so-called forward drag effects. For example, a large number of electric cars were sold in December because buyers still wanted to take advantage of the state bonus. “That requirement is now missing,” said Wollrab. In addition, many consumers will have to pay more for electricity and gas from the beginning of the year. “There is no money for other expenses.”

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