Coal and iron ore sit on cargo barges at a port in Duisburg, Germany. German industry is growing more optimistic about the economic outlook
Coal and iron ore sit on cargo barges at a port in Duisburg, Germany. German industry is growing more optimistic about the economic outlook © Krisztian Bocsi/Bloomberg

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Germany’s economic outlook received a double boost on Tuesday, as business sentiment improved for the fourth consecutive month and the impact of the pandemic on the economy was found to be less severe than first thought.

The Ifo Institute in Munich said its monthly survey of 9,000 German companies found that sentiment had become “markedly more positive” in August as its overall score for the country’s business climate rose from 90.4 in July to 92.6.

“The German economy is on the road to recovery,” said Clemens Fuest, head of the Ifo. “In manufacturing, the business climate improved considerably . . . Service providers were decidedly happier with their current business situation.”

Separately, the national statistics office, Destatis, said that the historic economic contraction in the second quarter was slightly less severe than its initial estimates, publishing new figures that showed Europe’s largest economy shrank 9.7 per cent quarter on quarter, down from the 10.1 per cent it had initially reported.

Germany’s economy is coming through the pandemic in better shape than many other large European economies, helped by a shorter and less strict lockdown, stronger government support and a lower reliance on hard-hit industries such as tourism. 

However, there are worries that a recent resurgence in daily coronavirus infection levels, caused by increased socialising and holiday travel, could prompt fresh restrictions and cause the economic recovery to stall.

The government is widely expected to prolong some of the main measures it introduced to shield workers and companies from the fallout of the pandemic. Officials are due to meet in Berlin later on Tuesday to discuss a proposal by finance minister Olaf Scholz to extend the Kurzarbeit furlough scheme from 12 months to 24 months. 

Katharina Koenz, eurozone economist at Oxford Economics, said: “Despite the encouraging signs of a solid recovery, we caution that the path to recovery is still long.”

She added that “activity in many sectors is still substantially below pre-pandemic levels and they rely heavily on fiscal support”.

The Ifo survey found that German businesses’ assessment of their current situation had improved for the third month in a row, while their expectations for the next six months inched up for the fourth consecutive month.

Sentiment improved most sharply among companies in Germany’s export-focused manufacturing sector. However, while industrial companies were growing more optimistic about the future, many “still consider their current business to be poor”, Mr Fuest said.

The outlook of companies in Germany’s domestic-focused services sector continued to improve, but Mr Fuest said that in the retail and wholesale trade sector “the upward trend in the business climate flattened noticeably”.

The data boosted the euro, which rose 0.4 per cent against the dollar to $1.1830. The Europe Stoxx 600 index climbed 0.4 per cent, Germany’s DAX was 0.4 per cent higher and France’s CAC 40 gained 1 per cent.

The price of German government bonds and gold, which are often purchased as a haven from economic uncertainty, both fell on Tuesday.

The national statistics office said its new estimate for the second-quarter contraction in gross domestic product was still the largest since such calculations started in 1970, far outstripping the previous record 4.7 per cent decline caused by the financial crash in the first quarter of 2009.

Germany had a budget deficit of €51.6bn in the first half of the year, worth 3.2 per cent of GDP, the statistics office said. Government revenue fell for the first time in a decade, dropping 3.6 per cent in the year to June, while state spending rose 9.3 per cent.

The deficit contrasts with a budget surplus of €46.5bn in the first half of last year. But it was below the 7 per cent budget deficit forecast for the full year by the German central bank.

Destatis said household consumption fell 10.9 per cent between the first and second quarters, while business investment in machinery and equipment fell 19.6 per cent. Government spending rose 1.5 per cent. Exports, accounting for about half of German GDP, fell a record 20.3 per cent and imports sank 16 per cent. 

Net wages and salaries dropped 4.3 per cent from the previous year, as more than 6m jobs were protected by the Kurzarbeit scheme, and the savings rate doubled to just over 20 per cent. 

The average number of hours worked per person in employment “decreased extraordinarily” by 8.8 per cent in the second quarter compared with the previous year, Destatis said, but the total number of people in employment fell only 1.3 per cent to 44.7m. 

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