Ifo indicator inches upwards

The Ifo business climate hardly increased in July (88.6 after 88.4). The rise fell short of expectations (Consensus & Commerzbank: 89.0). The assessment of the current business situation improved more significantly this time (86.5 after 86.2), while expectations for the next six months virtually stagnated (90.7 after 90.6). In June, it was the other way around. Regarding individual sectors, the business climate in the manufacturing industry recovered more strongly (-11.8 after -13.9) than in other major industries, after stagnating in June.

Leading indicators are climbing upwards

The chart below shows that the Ifo business climate has risen for the seventh month in a row. However, the pace of recovery is weak. This is also true for the Purchasing Managers' Index and manufacturing orders. The upward movement is dampened by the looming higher US tariffs and the continued poor competitiveness of the German economy, for which most companies do not expect any substantial improvement due to the lack of a fresh start in economic policy.

But the fiscal stimulus is enormous

We predict strong GDP growth of 1.4% for the coming year only because of the immense fiscal package. The federal government is significantly shifting expenditures from the core budget to special funds and to budget areas exempt from the constitutional debt brake (defense spending over 1% of GDP). The government quickly uses the created fiscal space in the core budget for other expenditures – such as subsidies for agricultural diesel, special depreciation, reduced VAT in restaurants, or cheaper electricity. The fiscal stimulus by 2026 corresponds to more than 1% of GDP. With this magnitude, significantly higher growth is almost inevitable, even if the long-term growth prospects remain subdued.

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