Business morale in Germany has reached its highest level in nearly three years, suggesting that growth rebounded in the eurozone’s largest economy in the fourth quarter.
The closely watched Ifo business climate index, compiled by the Munich-based think tank, rose to 111 in December, from 110.4 in November. This is the highest level since February 2014 and above the reading of 110.7 that had been forecast by economists.
“The German economy is in a festive mood,” Clemens Fuest, president of the Ifo Institute, said. “The outlook for the first half of 2017 is also slightly more optimistic. The German economy is making a strong finish to the year.”
After a temporary slowdown in the summer, the economy expanded by a mere 0.2 per cent in the third quarter, halving from the first quarter, as it was hit by a lack of business investment, uncertainty surrounding the Brexit vote in the UK and a slowdown in the emerging economies that had driven German exports.
However, strong domestic demand in Germany has led to a positive assessment of present business conditions for the 7,000 companies surveyed by the Ifo, following similar surveys on sentiment from both IHS Markit and the Centre for European Economic Research last week. The sub-index on current business conditions rose from 115.6 to 116.5, the highest level since February 2012.
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Strong domestic demand in Germany has been supported by low inflation, low interest rates, higher wages and a robust labour market. This, in turn, has led to a boom in the construction sector, with increased demand for housing in urban areas and property investors piling into newly desirable areas of Berlin and Hamburg. German factory orders also surged in October, jumping 4.9 per cent from September, marking the biggest increase since July 2014.
Rainer Sartoris, an economist at HSBC, said: “The sentiment continues to support the view that the slowdown of the German economy in the third quarter was just a soft spot.”
Last week, the Ifo institute raised its growth forecasts for the German economy to 1.5 per cent in 2017 and 1.7 per cent in 2018. That was an extra 0.1 percentage points for each year.
A strong German economy is considered vital for the eurozone at a time of increased concern about the bloc, with the Italian banking system under severe pressure.
“Real risks to the German outlook mainly seem to stem from the outside”, Carsten Brzeski, an economist at ING, said: “The unknown impact from president-elect Trump, the Brexit uncertainty and renewed political tensions in Europe due to several elections or a new flaring up of the Greek crisis are the biggest risks for 2017.”