As for the euro crisis, we saw another small tick up in Germany’s Ifo index in April, climbing to 86.9 from 86.7 in March. This minor growth especially marks the German economy as a rather dynamic one. It still sails through some pretty stormy political and trade waters. The Ifo index is a key barometer of business optimism in Germany. Fleeting but positive While usually slow to react politically, this largely mirrors a guarded optimism on the part of businesses, despite global trade and war uncertainties.
The increase in the Ifo index was mainly fueled by a sharp rise in the current assessment component. This would indicate that companies are becoming more optimistic about their current situation, despite bluer expectations for the future. The business expectations sub-index of the index fell to 87.4 from 87.7 in March. This drop is indicative of greater corporate concerns over short-term economic prospects.
So far, German firms seem to be taking all this new trade hostility in stride, at least for now. The ongoing negotiations and potential tariffs from the United States loom over the economy, which finds itself caught between two seismic activities: an incoming government and the implications of US tariffs. The uncertainty about all these changes is understandably high, though it appears business is taking a wait and see approach.
The new prospective government in Germany has already adopted dismal structural reform ambitions. That’s genuinely troubling, considering the pressing economic challenges we need to more effectively address. Yet it will enjoy access to an unprecedented fiscal space that, if deployed effectively, would allow for all-encompassing investments into infrastructure and defense. This kind of fiscal stimulus will support stronger growth over the long term, delivering the shot in the arm that the economy desperately needs.
Yet even with these possible benefits, US tariffs would still be deeply felt by the German economy. The damage from the first round of tariffs will soon present barriers for a speedy rebound. That has the potential to delay the rebound until at least the second half of the year. Further, major revisions to the Germany-China trade relationship could result in major long-term benefits for Germany’s economic future.
Confidence indicators and hard data suggest that the German economy has bottomed out during the first quarter of the year. Despite this reality, official predictions for growth in Germany this year are coalescing around a third consecutive year of stagnation. Some analysts are even forecasting that Germany can weather up to three consecutive years without growth. Such a situation would be historic for the nation.