For nine months, German companies and managers looked to the future with a big dose of Angst even though their business was booming.
The 9,000 firms surveyed by the Ifo economics institute kept saying things were good, outstanding even. When asked about the outlook, however, their brows furrowed at the prospect of US President Donald Trump triggering a trade war.
But now their mood has brightened. The Ifo business climate index, Germany’s most closely-watched leading indicator, beat economists’ expectations by jumping to 103.8 from 101.7 in August, the first increase since last November, while business expectations for the next six months jumped a full three points to 101.2.
“In addition to a robust domestic economic situation, the truce in the trade conflict with the US contributed to improved business confidence,” Ifo President Clemens Fuest said in a statement.
Trade war averted
The looming trade war between the US and Europe appears to have been averted after Mr. Trump agreed last month during a meeting with European Commission President Jean-Claude Juncker to refrain from imposing threatened car tariffs on European firms. The two sides also started talks to cut tariffs on steel, aluminum and other goods.
That has cheered up Germany’s auto sector as well as other industries. “The fact that the two economic superpowers US and China are holding trade talks likely got a good reception from German managers as well,” said Thomas Gitzel, chief economist at Liechtenstein’s VP Bank.
There have even been signs of reconciliation between the US and Mexico in their row over the North American Free Trade Agreement.
Ifo no longer expects the second-half economic slowdown that most economists had been predicting a few months ago.
Too early to pop the champagne corks
“The German economy is performing robustly. Current figures point to economic growth of 0.5 percent in the third quarter,” said Mr. Fuest. That’s the same rate as in the second quarter.
But economists said it was too soon to pop the champagne corks. One positive month after nine months of skepticism doesn’t make a turnaround, said Uwe Burkert, chief economist at Landesbank LBBW. “An upturn is traditionally only diagnosed after three increases in succession,” he said.
The trade dispute between the US and China continues to simmer and German companies that export to both countries could get caught in the crossfire. If there is a hard Brexit – meaning Britain, one of the most important buyers of German goods, would crash out of the EU without a trade deal – and if Mr. Trump decides to start new conflicts, Germany’s business optimism could quickly evaporate.
Forecast looking brighter
For the time being though, Europe’s largest economy remains on the up and up. Fueled by strong consumer spending, the service sector saw the biggest increase in business expectations since June 2009, when the recession in the wake of the financial crisis was coming to an end, Ifo said.
And the construction sector, fueled by Germany’s booming real estate market, continued to enjoy a record rise in business sentiment.
Ifo is now considering raising its forecast for 2018 again after most of the country’s leading institutes had lowered it to 1.8-1.9 percent in the spring from the 2.2-2.5 percent they had predicted at the start of the year.
The German government may end up getting it right — it expects German GDP growth of 2.3 percent this year and 2.1 percent next.
Donata Riedel covers economic policy for Handelsblatt. David Crossland adapted this story into English for Handelsblatt Global. To contact the author: email@example.com.