What the Ifo disappointment means

The stagnation in the German Ifo business climate after three consecutive increases is disappointing.

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Dr Jörg Krämer

Commerzbank Economic Research

May 27 2024

The German economy is unlikely to grow significantly in the second quarter. We show why real GDP should nevertheless rise from the middle of the year.

Most ECB Governing Council members are saying that wage growth, and therefore the pressure on consumer price inflation, is weakening. At least the ECB's recently published collective wage indicator contradicts this theory. According to the indicator, collectively agreed wages in the eurozone rose by 4.7% in the first quarter of 2024 compared to the previous year, and thus more strongly than in the fourth quarter of 2023 with 4.5%. Together with the third quarter of 2023, this is the strongest increase since the data was recorded in 2005.

After three consecutive increases, the Ifo business climate index stagnated in May. At 89.3, the index was well below economists' expectations (consensus: 90.4; Commerzbank: 90.5). The decline in the assessment of the current business situation (88.3 after 88.9) offset the further improvement in business expectations (90.4 after 89.7).

The German economy is set to stagnate in the second quarter, ...

All in all, today's Ifo figures show that the further rise in business expectations will not translate quickly into an improvement in the business situation. This supports our forecast that GDP is unlikely to increase in the second quarter, especially as construction activity was brought forward to the first quarter due to the unusually mild weather.

... but should still go up from mid-year onwards

However, German real GDP is expected to start growing again from the middle of the year:

  • The stagnation of the business climate in May was only due to a decline in the services sector. In the other sectors, especially in manufacturing, the business climate continued to improve.
  • The composite purchasing managers' index for the manufacturing and services sectors has now risen significantly for three consecutive months and is on an upward trend. This is also the case for the corresponding index in the euro area, which is closely linked to GDP.
  • The impact of negative economic factors is fading. It is now more than a year since the very sharp rise in key interest rates, and more than half of the rise in energy prices following the start of the Russian invasion of Ukraine has been reversed.

Conclusion: up, but slowly

All in all, we expect German GDP to pick up again from the middle of the year. However, the upward trend is likely to be moderate, partly because the German government is not taking decisive action to counter the erosion of the country's quality as a business location that has been observed for many years. We expect GDP to stagnate on average in 2024 (0.0%) and to grow by 0.8% in 2025.

For full text see attached PDF-Version.