German Ifo business climate rises sharply in March on strong domestic demand

German Ifo business climate rose strongly in the month of March, owing to the marked plus in the service sector. The Ifo business climate index rose to 99.6, as compared with the consensus expectations of 98.5. The rise was nearly exclusively linked to business expectations, the assessment of the current business situation more or less stagnated, noted Commerzbank in a research report.

The first positive aspect is that the Ifo business climate has risen for the first time since September 2018. It more than covered the slump recorded in the month of February. However, looking at the breakdown of the March figures shows that the rise in the business climate was not widespread. There was only a plus in services, trade and construction sectors, which are being advanced from continued stable domestic demand. On the contrary, the export-oriented industry continued to decline strongly. This is consistent with the PMI’s index for German manufacturing, which dropped in March.

Figures released today underpin the assessment that the German economy is mainly suffering from the softening momentum of the export business. This applies mainly to exports to China, which have either dropped in the past three months in year-on-year terms, after having increased at double-digit rates in 2017.

German exports to China are likely to recover in the medium term because the Chinese government has set up a significant economic stimulus package that should work given the huge influence the Chinese government has on its economy. But it might take some time before this is reflected positively in German export data. Until then, manufacturing, unlike the domestically oriented sectors, will have to live with bad news.

After the German economic growth stagnated in the fourth quarter of 2018, only special factors indicate towards a slight rise in the first quarter of 2019. The slight rise in car production in February implies that it is slowly rebounding from the issues with emission tests.

“For 2019 as a whole, we continue to expect a meagre GDP growth of 0.6 percent”, added Commerzbank.

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