An employee monitors production at a Bayer CropScience research and development facility in Frankfurt, Germany. Germany’s economy is recovering after the sharp downturn caused by coronavirus.
An employee monitors production at a Bayer CropScience research and development facility in Frankfurt, Germany. Germany’s economy is recovering after the sharp downturn caused by coronavirus. © Bloomberg

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Morale among German business executives has reached its highest level since the coronavirus pandemic hit earlier this year, exceeding economists’ expectations for the recovery.

The monthly business climate index published by Germany’s Ifo Institute showed a reading of 90.5 in July, up from 86.2 in June, according to data published on Monday. This topped the 89.3 level that was forecast by economists polled by Reuters.

The rise was driven by an improvement in businesses’ assessment of current conditions — which rose 3.2 points month on month to 84.5 — and their expectations for the future, which rose 5.4 points to a reading of 97.

In Germany’s service sector, the business climate index climbed into positive territory to 2 from minus 6 in June.

The business climate in the manufacturing sector also improved substantially, although sentiment remained depressed by normal standards. The manufacturing section of the index hit a reading of minus 12, compared with minus 22.7 in June. Capacity utilisation increased from 70.4 per cent to 74.9 per cent, but remained below its long-term average of 83.5 per cent.

Line chart of Ifo business climate index showing German business confidence edges towards pre-virus levels

The survey raised economists’ hopes that the country could pull Europe out of the virus-driven recession into which it slumped in the first half of this year.

“The German economy is recovering step by step,” said Clemens Fuest, president of the Ifo Institute, adding that companies were considerably more satisfied with the current business situation than in previous months.

But optimism among the nation’s companies has not yet climbed to pre-pandemic levels and some analysts fear that the bounceback is losing steam. 

An increase in corporate indebtedness, combined with growing job losses and the threat of a second wave of coronavirus infections are likely to “dampen the willingness to invest and consume”, said Marco Wagner, an economist at Commerzbank.

Separate data published on Monday showed that credit flow to the eurozone’s private sector rose 7.1 per cent year on year in June, a slight deceleration from the 7.3 per cent growth in May but suggesting that companies continued to tap credit lines after economies began to reopen after lockdown.

Line chart of Ifo business climate by sector (index) showing Germany's service sector helps drive sentiment recovery

The data illustrated that eurozone companies had built “large liquidity buffers” during the lockdown period, said Oliver Rakau, chief German economist at Oxford Economics.

Carsten Brzeski, an economist for Germany at ING, said Monday’s Ifo data was the latest in a series of releases that confirmed the country’s economy was experiencing a rebound, but he warned that “the real face of the recovery will only become clear in the coming months”.

Although fiscal stimulus efforts by the German government and Brussels “bode well for domestic demand and eurozone exports”, the structural damage that coronavirus has caused to the German economy “as well as continued weaknesses in major trading partners outside of the eurozone” would continue to pose a drag on the recovery, Mr Brzeski said.

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