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Ifo head says German recession 'unlikely' due to brighter business sentiment

Ifo's Business Climate Index rose to 90.2 points in March, up from 88.6 points in February, on the back of less pessimistic expectations. However, the index remains below its 2021 and early 2022 level. Companies reported lower satisfaction with their current situation, offset by better sentiment on trade and signals of present satisfaction and future optimism from manufacturing firms.

January 25, 2023
6 minutes
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The Ifo Institute's widely watched survey showed that German business sentiment improved in January, indicating that the country's economy could avoid a recession.


Ifo's Business Climate Index rose to 90.2 points in March, up from 88.6 points in February, on the back of less pessimistic expectations. However, the index remains below its 2021 and early 2022 level. Companies reported lower satisfaction with their current situation, offset by better sentiment on trade and signals of present satisfaction and future optimism from manufacturing firms.


Clemens Fuest, president of the Ifo, told CNBC's Arabile Gumede that the expectation was that there might be a recession in the fourth quarter of '22 and the first quarter of '23. However, it now appears that the last quarter was flat. The economy may still be shrinking a little in the first quarter, but given the improvement in expectations for the next month from businesses, it is unlikely we will have a technical recession, which would be two negative quarters.


The latest figures from Germany’s national statistics office showed the country’s July-September GDP up by 0.4% on the quarter and by 1.2% on the year. Initial estimates suggest growth of 1.9% for the whole of 2022 and stagnation in the final quarter. But there have been repeated warnings that Germany and other European countries could face a recession amid an energy crisis, a manufacturing slowdown, high inflation and downbeat consumer and business sentiment. Fuest said that improvements in the energy market are responsible for the improved sentiment, because of both the fall in market prices and the lack of potential gas rationing.


"This was the most important risk for the economy," Fuest said on CNBC's "Street Signs" program. "A scenario where gas supplies would simply be insufficient for the winter and parts of manufacturing would have to be cut off."


The scenario of a gas shortage is no longer a concern, as gas stores are full and temperatures have been relatively mild this winter. This explains the decline in prices, but it also means that we will avoid the very bad risk and hit to the economy that a gas shortage would have caused.


After Purchasing Managers Index figures were released on Tuesday, it was revealed that there was a modest return to growth in euro zone activity in services and manufacturing in January. The S&P Global euro zone composite PMI was 50.2, up from 49.3 in December. The 50 mark separates expansion from contraction.
Fuest said that a number of factors were improving within German manufacturing, including energy prices and supply chain bottlenecks. He added that these improvements were helping to make German manufacturing more competitive.


He said that they expect the situation to slowly but steadily improve throughout the year. Construction costs in Germany have been rising sharply, and Fuest noted that this could pose a problem for the country going forward. Interest rates are also on the rise, which could make it more difficult for Germans to afford new homes or renovations.


The Ifo survey showed that construction businesses were slightly less pessimistic about the future, but also less satisfied with their current situation. This indicates that there is still some uncertainty about the future of the construction industry, but that businesses are generally doing okay at the moment. Fuest pointed out that China's reopening presents a mixed bag of potential outcomes - on the one hand, increased demand could lead to inflation in energy prices and raw materials, but on the other hand, supply chains could flow more smoothly.


Investors are now wondering how the European Central Bank's upcoming interest rate decisions will be affected by the combination of Europe's largest economy potentially avoiding a recession, but also a slowdown in headline inflation. The ECB next meets on February 2.


Fuest said that in his view, the ECB may be slightly less aggressive than last year, when it raised rates four times to bring its deposit rate to 2%. He expected that hikes would need to continue, given that core inflation without food and energy was still rising and union wage demands were taking inflation into account.
He said that we are not out of the woods on this yet.

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