German Economy Is Set to Pick Up as Business Confidence Improves

  • Ifo business climate index rises to highest in 2 1/2 years
  • Gauges for current situation, expectations both improve

Germany’s economy is on track for more robust growth.

Business confidence rose to the highest level in more than two years in October, the Munich-based Ifo institute said on Tuesday. This adds to signs of renewed growth momentum in Europe’s largest economy, after uncertainty related to the U.K.’s vote to leave the European Union contributed to a temporary slowdown.

Germany’s economic performance has been the driving force of the euro area’s recovery so far, and a wide range of indicators suggests it will continue to bolster output. The European Central Bank has expressed confidence that a “moderate but steady” pace of growth can be maintained in the 19-nation region despite political uncertainty and slowing global trade, with policy makers pondering whether and how to expand quantitative-easing program.

“After the surprising Brexit vote had temporarily unsettled companies in Germany, early indicators are again on an upward trend now,” said Stefan Kipar, an economist at BayernLB in Munich. “The pick-up was mainly due to an improvement in business expectations, but the assessment of the current situation also improved somewhat in October from an already high level.”

In Tuesday’s report, the Ifo institute said its business climate index climbed to 110.5 from 109.5 in September. That’s the highest level since April 2014 and compares with a median estimate in a Bloomberg survey of economists of 109.6. An index for economic expectations rose to 106.1 form 104.5, while the evaluation of the current situation also improved to 115 from 114.7.

An acceleration of economic activity had already been signaled by IHS Markit’s Purchasing Managers’ Index on Monday. Manufacturing accelerated at the fastest pace in almost three years in October, as companies boosted hiring, partially in response to stronger foreign demand from the U.S and Asia. This is a sign that August’s surge in industrial production may be set to continue.

Economists surveyed by Bloomberg predict the German economy expanded 0.3 percent in the third quarter, after 0.4 percent in the previous three months. Gross domestic product data are due on Nov. 15.

Strong Momentum

The Bundesbank has dismissed weaker growth in the third quarter as temporary, arguing that underlying momentum remains strong. Export and business expectations in manufacturing suggest the situation could improve in the coming month, the central bank said in its monthly report on Monday.

While Germany’s economy may be headed for a pick-up, data suggest that the rest of Europe will continue expanding at a slower pace. A gauge for factory and services activity in France signaled weaker growth in October, and a separate report showed Tuesday that manufacturing confidence in the region’s second-largest economy slipped.

In Germany, “growth may even have accelerated toward the end of the year,” said Jennifer McKeown, chief European economist at Capital Economics in London. “With other parts of the euro zone, particularly France and Italy, performing far worse than their larger neighbor, the ECB will remain under pressure to offer more policy support to achieve its region-wide inflation goal.”

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