(May 22): Germany’s business outlook improved for the first time since fighting broke out in the Middle East, demonstrating some resilience to the war for Europe’s biggest economy.
An expectations index by the Ifo institute rose to 83.8 in May from a revised 83.5 the previous month. That’s a little higher than the median estimate in a Bloomberg survey of economists and the first positive turn in three months. A gauge measuring current conditions unexpectedly increased.
“After the shock of the war, which could be seen in March and April, we now have a slight stabilisation,” Ifo president Clemens Fuest told Bloomberg Television on Friday. “Businesses are trying to adapt to this new situation. Nevertheless they’re facing challenges.”
Germany, like the rest of Europe, is starting to experience a drag on its economy as the Iran war feeds inflation and saps confidence among households and firms. The government has already halved this year’s growth forecast and business surveys this week showed private-sector activity shrinking for a second straight month in May.
Separate data on Friday showed a surge in exports and higher government spending offset flat consumer demand and a drop in investment to ensure first-quarter (1Q) expansion of 0.3%, matching an earlier estimate.
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The numbers offer a small reprieve for German Chancellor Friedrich Merz, who’s faced pressure to rekindle growth through comprehensive reforms. The economy, Europe’s largest, hasn’t seen meaningful expansion in three years, with government infighting not helping its chances of improving.
Carsten Brzeski, global head of macro at ING, warned that trade won’t be able to repeat the strong performance, companies will probably hold on to higher inventory levels, private consumption is unlikely to recover, and higher interest rates will hamper activity in the construction sector.
“This leaves the public sector as the only possible source of growth in the second quarter,” he said. That’s “not a very promising outlook.”
See also: German private-sector activity affected by Iran war as it contracts for second month
With the Bundesbank predicting stagnation this quarter, some firms are already gloomy. Thyssenkrupp AG has trimmed its sales outlook, forecasting flat annual revenue at best. Volkswagen AG, which is already weighed down by tariffs, Chinese competition and sagging demand, saw its 1Q operating margin slip.
Others remain optimistic that things can get better. BMW AG expects demand in China to stabilise and US President Donald Trump to backpedal from his latest threat to raise tariffs on European cars. Siemens AG, meanwhile, announced it will repurchase as much as €6 billion of shares after orders climbed.
“We’ll probably get something like stagnation in the second quarter,” Fuest said. “It may even be slightly negative but we don’t see a recession.”
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