German business climate improves in April as manufacturing offsets services weakness - Ifo

Author: Jonathan Lopez


LONDON (ICIS)--Economic sentiment in Germany improved for a third consecutive month in April as healthy manufacturing activity – at its highest since 2018 and well above pre-pandemic levels – offset weakness in services, research institute Ifo said on Monday.

The Ifo Business Climate Index, which takes 2015 as the base (100 points), rose only slightly in April - although it marked three months of growth - in what is a welcome development for Europe's largest economy which has gone through the first quarter with its worst wave of the pandemic yet.

Strict lockdown measures remain in place as the nation's vaccination campaign has not had a fast roll out as elsewhere.

“Sentiment among German managers has improved slightly… Companies once again raised their assessments of the current business situation. However, they were no longer quite so optimistic about the coming six months,” said Ifo.

“Both the third wave of infections and bottlenecks in intermediate products are impeding Germany’s economic recovery… Fully 45% of companies reported bottlenecks in intermediate products – the highest value since 1991.”

In manufacturing, the business climate rose to its highest level since May 2018, with companies reporting greatly improved business due to healthy demand, which is keeping industrial plants working at a capacity utilisation rate of 86.2% in April, up sharply from 81.9%.

The index for the petrochemicals intensive construction industry, however, fell slightly in April, with companies also reporting a shortage of materials.

“Service providers were slightly less satisfied with their current situation. Recent signs of optimism have disappeared again. While the logistics industry is benefiting from the upswing in manufacturing, other industries are still suffering, in particular hospitality and tourism,” said Ifo.

“In trade, the business climate improved a little. This was due to significantly improved assessments of the current situation, especially among car dealerships. In contrast, there was much greater pessimism regarding the coming months.”

The increase in the Ifo index in April was, however, quite small - just a 0.2 percentage point improvement from March - and this has prompted the analysts at Oxford Economics to register a “slight disappointment” with the figures, which do, nonetheless, suggest a recovery in Germany and therefore the wider 19-country eurozone.

“The April Ifo results combine with other closely-watched surveys for the eurozone economy, including the European Commission’s Consumer Confidence indicator and the PMIs, signalling solid momentum improvement at the start of Q2,” said Ifo.

“Of course, it is likely the case that the bulk of the recent improvement is being driven by growing optimism about the future, underpinned by the vaccine roll-outs, rather than improvement in actual activity which might require a wider reopening of the eurozone economy.”

Oxford Economics concludes that most indicators already provide evidence "that the eurozone economy will record a healthy rebound this quarter”, followed by even stronger growth in the second half of 2021.

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