German Business Morale Improves

By Maria Martinez
BERLIN (Reuters) – German business morale unexpectedly improved in January, driven by a more positive assessment of the current economic situation, according to a survey released on Monday. However, many companies remain pessimistic due to ongoing uncertainties ahead of elections.

The Ifo Institute reported that its business climate index rose to 85.1 in January from 84.7 the previous month, surpassing analysts’ expectations of a steady 84.7 reading. The current conditions index increased to 86.1 in January from 85.1 in December, while the expectations index slightly dropped to 84.2 from 84.4.

Despite the better assessment of the current situation, there is widespread anxiety about the uncertain future. “Companies continue to be pessimistic,” stated Ifo President Clemens Fuest during a press conference.

The expectations index has reached its lowest point in a year, noted Carsten Brzeski, global head of macro at ING. He pointed out that the ongoing U.S. elections and policy uncertainty in Germany ahead of the upcoming elections dampen overall sentiment.

The Ifo index exhibited a decline in the industry and construction sectors, while it showed significant improvement in services and remained unchanged in trade. Despite the uptick in the main index, the German economy remains under stress, according to Franziska Palmas, senior Europe economist at Capital Economics. She remarked that the index is substantially lower than the average in the pre-pandemic period, suggesting a potential sharp contraction in GDP.

Palmas also indicated that weak sentiment, minimal fiscal easing from the upcoming elections, and ongoing struggles in the industry point to subdued growth for the year.

A snap national election in Germany is set for February 23, following the collapse of the three-way coalition government led by Social Democratic Chancellor Olaf Scholz. Disagreements over strategies to revitalize Europe’s largest economy contributed to the coalition’s downfall, with economic concerns now topping the list for German voters after two years of contraction.

The recent boost in business morale may also be attributed to increased imports from U.S. companies anticipating tariffs under new President Donald Trump, decreasing interest rates, and optimism that the next German government will pursue reforms to reduce bureaucratic barriers, according to LBBW senior economist Jens-Oliver Niklasch.

Polls indicate that Germany’s opposition conservative party holds a significant lead ahead of the elections.

The Ifo index corroborates findings from the Purchasing Managers’ Index published last week, which indicated stabilization in business activity within Germany’s private sector in January, ending a six-month contraction as growth in services countered continued declines in manufacturing.

Overall, key sentiment indicators suggest signs of recovery, said Commerzbank chief economist Joerg Kraemer. He noted, “This supports the forecast that the German economy will show some improvement from spring onward. A notable turnaround will necessitate a fresh start in economic policy, though potential coalition partners unfortunately have differing economic agendas.”