Ifo Survey: German Business Climate Steady in May

The German Ifo Business Climate Index remained unchanged at 89.3 in May, falling short of the forecasted 90.4, heightening concerns about a slowdown in the economic recovery of Europe’s largest economy.

The weaker-than-expected figures in Germany’s leading indicator signal stagnation in business morale and suggest that recovery after a cyclical downturn may take longer and progress more slowly than anticipated.

Economists expect the recovery to gradually gain momentum, despite the negative signals from business morale being partially offset by brighter business expectations.

Germany’s economy grew by 0.2% in the first quarter of this year, driven by recoveries in the industrial, construction, and trading sectors, following a contraction in the fourth quarter of 2023.

Economists remain cautiously optimistic but divided on the economic performance for the second quarter of 2024. Some predict stagnation, while others foresee potential for further expansion, though not significant, as the recovery in the services sector remains sluggish, keeping the overall situation fragile.

Another limiting factor could be inflation, which is expected to continue its downward trajectory in the coming months. However, there is a strong warning from signals indicating that many companies plan to raise their prices over the next three months, potentially slowing the process or sparking fresh price pressures.

Uncertainty also surrounds the timing of the first ECB rate cut, which will depend heavily on inflation figures and economic data, contributing to the near-term outlook.