LDN - Business

German business sentiment edges up but recession fears undimmed

[October 25, 2023] By Maria Martinez

BERLIN (Reuters) -Morale among German businesses edged up for the first time in six months in October, a leading survey showed on Wednesday, but their mood remained subdued and economists say a second recession inside a year still seems likely.

The Ifo institute said its business climate index stood at 86.9, beating a forecast of 85.9 by analysts in a Reuters poll and September's slightly revised reading of 85.8.

Companies were somewhat more satisfied with the current business situation and managers were also less pessimistic about the coming months, the survey showed.

Ifo president Clemens Fuest said Wednesday's reading showed the economy, which shrank in the last quarter of 2022 and the first quarter of 2023, "can see a silver lining ahead."

But several economists were less upbeat.

"It's difficult to see a ray of hope," said Alexander Krueger, chief economist at Hauck Aufhaeuser Lampe Privatbank, forecasting a recession in the second half of the year.

"The Middle East conflict is likely to have (put) a brake on expectations," Krueger said. "Growth hopes remain buried for the next few months."

In late September, before the Israel-Hamas conflict broke out, Germany's five leading economic institutes had forecast that Europe's largest economy would skirt a recession.

Joerg Kraemer, chief economist at Commerzbank, also suggested a recession was on the cards, with the low level of the Ifo index pointing to a second half contraction.

Kraemer did not expect a strong recovery next year, as interest rate hikes from the European Central Bank were still having an impact on the economy.

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A steel worker of ThyssenKrupp walks in front of a blast furnace at a ThyssenKrupp steel factory in Duisburg, western Germany, November 14, 2022. REUTERS/Wolfgang Rattay//File Photo

"In addition, companies are unsettled by economic and climate policy, especially since Germany's attractiveness as a business location has eroded over the past 15 years," Kraemer said.

'WORSE PICTURE THAN PMI'

Sentiment among German managers improved in manufacturing, services and construction, while it declined in trade, the Ifo survey showed.

The index had fallen in the four months up to August and was unchanged in September. The small October rise still pointed to a recessionary environment, said senior Europe economist at Capital Economics, Franziska Palmas.

The subindex for current conditions, which has a closer relationship with GDP than the headline reading, is still consistent with GDP contracting by around 1% quarter-on-quarter in the fourth quarter, she said.

"This chimes with our view that the German economy is again in recession," she added.

This is an even worse picture than that painted by the composite PMI, which fell in October but points to output dropping by only 0.5%, she said.

Tuesday's Flash Composite PMI, compiled by S&P Global, fell to 45.8 in October from September's 46.4, pointing to a contraction in business activity for a fourth straight month.

(Reporting by Rachel More and Maria Martinez, Editing by Friederike Heine, Toby Chopra and John Stonestreet)

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