“Economy is picking up speed”: Business climate in May significantly better than expected

The mood of companies in Germany is brightening unexpectedly in view of the vaccination progress and the falling number of corona infections. The Ifo business climate index climbed to 99.2 points in May from 96.6 points in April and thus to the highest value since May 2019, as the Munich economic research institute announced on Tuesday for its manager survey. Analysts had expected a weaker increase to 98 points. "The German economy is picking up speed," said Ifo President Clemens Fuest. Managers have assessed both their current situation and the business outlook for the next six months as more favorable than recently.

The business climate improved in all areas considered, even in the trade and services sectors, which were severely affected by the Corona restrictions.

“Optimism returned, especially in the hospitality and tourism sectors,” explained Fuest.

Wholesaling continues to benefit from the good industrial economy, retailers are hoping for further corona easing.

The mood also brightened at the building site.

However, the problem of material shortages has worsened again, said Fuest.

There are currently delivery bottlenecks for many raw materials and intermediate products, which are due, among other things, to problems in international trade due to the corona pandemic.

Back on the growth track

"The downside are the high purchase prices for primary products and raw materials," said Ifo economist Klaus Wohlrabe.

"Rising costs are increasingly being passed on: More and more companies are stating that they want to increase their sales prices."

According to the Bundesbank, the German economy is returning to growth.

The gross domestic product (GDP) should therefore increase significantly again in the second quarter.

In its recently raised forecast, the federal government anticipated 3.5 percent growth in the German economy for the year as a whole.

In the first quarter, GDP shrank by 1.8 percent due to the corona-related slump in consumption, as the Federal Statistical Office announced on Tuesday.

The economic downturn turned out to be somewhat stronger than initially assumed.

In a first estimate, the Wiesbaden authority had assumed a decrease of 1.7 percent.

Private consumption slowed

The renewed restrictions in the course of combating the coronavirus slowed private consumption, which is normally a reliable pillar of the domestic economy.

Private consumer spending slumped 5.4 percent compared to the previous quarter.

The expiry of the VAT cut at the turn of the year also had a dampening effect.

Consumers had brought purchases forward to the second half of 2020 because of the lower tax rates.

These purchases were now missing from the consumption statistics for the first three months of the current year.

The companies invested somewhat less in machines, devices and vehicles (minus 0.2 percent).

Foreign trade, on the other hand, benefited from rising global demand.

However, imports of goods and services (plus 3.8 percent) rose significantly more than exports (plus 1.8 percent).

After the crash at the beginning of the Corona crisis in spring 2020, Europe's largest economy initially recovered and grew, in some cases vigorously, for two quarters in a row. Economists assume that the German economy will quickly pick up speed again. More and more people are vaccinated against the coronavirus, and restrictions are increasingly being relaxed again.