Decline in German business outlook shows challenges

Bloomberg

German business expectations took a surprising turn for the worse at the start of the year, underscoring the challenges Europe’s largest economy faces in exiting a protracted
slowdown.
The Ifo Institute’s measure of executives’ outlook fell to 92.9, missing economist estimates for a gain. The drop was driven by dwindling prospects in services and construction — sectors that supported Europe’s economy in recent quarters — while a gauge for manufacturing continued to improve. The euro declined after the report and traded at $1.1017 at 10:36 am Frankfurt time.
Policy makers have been hoping that rising optimism among companies would lead to a broader economic recovery in Germany and the euro area.
Surveys published last week showed that factory activity in the currency bloc and its largest economy is still shrinking, though at a slower pace.
“The stabilisation we saw in manufacturing last year is continuing, and because manufacturing is so important to the German economy we take this overall as a good sign despite the decline in the overall index,” Ifo President Clemens Fuest said in a Bloomberg TV interview.
“Manufacturing is recovering from a substantial shock. A big rebound remains unlikely while industry grapples with structural issues that take time to work through.
But we expect Germany’s economy to expand slightly faster in 4Q than the 0.1% growth rate recorded in 3Q. And some further acceleration can be expected this year as sentiment improves.”– Jamie Rush of Bloomberg Economics said.

Yet there’s still some way to go amid continued risks to growth that’s sluggish at best. The Chinese economy, one of Germany’s top three trading partners, is slowing, and President Donald Trump’s threat of tariffs on European cars is still looming large. That would hit Germany — home to Volkswagen, the world’s largest carmaker — particularly hard.
Fuest sees a trade war and a recession in China as biggest threats.
“China continues to be a very important market for Germany, has a huge impact on the global economy,” he said. “That is the major threat — more I would say than the threat of a trade war with the U.S.”
Last week the European Central Bank expressed hopes about signs of stabilization in the 19-nation euro area, citing easing global trade tensions following a U.S.-China deal on trade and a mildly expansionary fiscal policy. In Germany, government spending on infrastructure is close to record levels, according to Finance Minister Olaf Scholz, after the country ran budget surpluses for the past six years.