German business sentiment improved more than anticipated in October, according to the Ifo Institute

The latest survey from the Ifo Institute shows a surprising boost in German business sentiment, with the Ifo business climate index rising to 86.5 in October, up from September’s 85.4 and beating market expectations of 85.6. This increase breaks a four-month decline in business morale and provides a glimmer of optimism for the German economy as it heads into the fourth quarter. The improvement follows PMI data showing a slower contraction in business activity, suggesting temporary stabilization in Europe’s largest economy despite ongoing challenges in the industrial sector.

Economists remain cautious, however, as Germany could face a tough winter impacted by weak global demand and ongoing industrial struggles. Calls for domestic policy intervention to spur growth are increasing. The German government has committed to tackling structural issues through initiatives to reduce bureaucracy, increase labor market flexibility, and attract investment. Chancellor Olaf Scholz is set to meet with industry leaders next week to strategize on reversing the downturn.

Official data for Q3, expected next week, may confirm a technical recession, following a 0.1% contraction in Q2 and likely further decline in Q3. The government’s 2024 forecast predicts a 0.2% GDP contraction, marking a second consecutive year of negative growth and positioning Germany as one of the weaker performers among major eurozone economies.