German Business Ignores Brexit Fears as Confidence Improves

  • Ifo business climate index rises to 107.7 from 106.7
  • Gauges for current situation, expectations also increase

German Industry Not Too Concerned About Brexit, Says Ifo

German business sentiment improved to the strongest level in five months in May, a sign that growth momentum in Europe’s largest economy remains strong.

The Munich-based Ifo institute’s business climate index rose to 107.7 from a revised 106.7 in April. That beat the median estimate in a Bloomberg survey of economists, which was for an increase to 106.8.

The vote of confidence in Germany’s economic outlook comes a day after investors expressed concerns that a U.K. exit from the European Union would damp growth after gross domestic product increased at its fastest pace in two years at the start of this year. The Bundesbank has said that the country’s economy can retain its underlying strength, even though expansion would slow somewhat this quarter.

“German industry doesn’t seem too concerned about Brexit,” Clemens Fuest, president of the Ifo Institute, said in an interview with Bloomberg Television. “At the same time, we’ve had favorable conditions for some time now -- low euro, low oil prices, low interest rates, and people were waiting for this to feed through in the German economy and it seems it’s coming now.”

A measure of current economic conditions climbed to 114.2 from 113.2, the Ifo report showed. A gauge of expectations rose to 101.6 from 100.5, with companies “noticeably more optimistic with regard to the coming months,” according to the report.

Booming Construction

Construction is doing particularly well, according to Fuest. Confidence in the sector rose to the highest level since 1991.

“Low interest rates play an important role,” he said in the interview. “A lot of investors are taking their money from bank accounts and putting it in construction investments.”

Improving confidence in Germany may provide some respite for European Central Bank President Mario Draghi as he and his colleagues try to discern whether they’ve done enough to sustain an economic recovery in the euro area, or if more stimulus is needed. 

Policy makers, who will convene in Vienna on June 2, have pumped liquidity into the region via asset purchases and cut interest rates to record lows as they try to revive inflation. The ECB is set to start buying corporate bonds next month and will also offer cheap long-term loans to banks to spur credit growth.

The Ifo index “has now reversed most of the decline seen at the turn of the year amid fears for the global economy,” Jennifer McKeown, senior European economist at Capital Economics in London, said in a note on Wednesday. The increase in May “suggests that the economy has continued to grow at solid rates, but the fast pace seen in the first quarter will not be sustained.”

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