– by Reinhard Becker and Klaus Lauer and Holger Hansen
Berlin (Reuters) – Despite fears of a recession on the stock markets, the mood in the German economy has recovered somewhat after the Ukraine shock.
The business climate brightened up surprisingly in April. The barometer rose by one point to 91.8 points, as the Munich-based Ifo Institute announced on Monday in its monthly managerial survey. Economists surveyed by Reuters had expected a slight downturn. After the mood slump in March, the economy is now “resilient,” said Ifo President Clemens Fuest. But the worries about an economic downturn have not disappeared, experts warn.
“Business expectations in industry are still at levels at which recessions had occurred in the past,” said Commerzbank Chief Economist Jrg Krmer. It is fitting that investors’ fears of a downturn have even increased in recent weeks: “The stock markets are weighed down by the fear that the interest rate hikes necessary to combat persistent inflation will damage the economic engine, which was first caused by the corona pandemic and then by the war in Ukraine has stalled,” said investment strategist Jürgen Molnar of brokerage house RoboMarkets. “The question now no longer seems to be whether, but only how severe a recession will be in Europe.”
Another stress factor was corona lockdowns in dozens of Chinese cities. The consequences of these measures to contain the corona pandemic would hit the German economy in the next few months, Ifo expert Klaus Wohlrabe warned: “This will exacerbate the supply chain problems in industry and limit the availability of goods in retail.”
CONSTRUCTION AHEAD “DICCULOUS YEAR”
In the manufacturing sector, however, the Ifo barometer initially rose again in April after the crash in the previous month. In the service sector, the business climate even improved noticeably. But in construction, the barometer fell to its lowest level since May 2010. The industry, which has been booming for many years, is now looking to the future with skepticism. “Less than a quarter of our construction companies expect even higher sales in 2022, while a good 40 percent expect lower sales than in 2021,” said Felix Pakleppa, General Manager of the Central Association of the German Construction Industry. “We have a difficult year ahead of us.”
Chief economist Alexander Krger from the private bank Hauck Aufhuser Lampe doesn’t see the rise in the Ifo barometer as a turning point: “Due to the Ukraine war, the overall weather situation is no different than it was a month ago. That’s why companies remain in a bad mood, especially with a view to the future.” Commerzbank expert Krmer also sees it this way: “Industrial production is likely to fall in the second quarter.” Therefore, despite the easing of corona restrictions, gross domestic product (GDP) will probably only stagnate in the second quarter.
According to estimates by the Bundesbank, the economy was already treading water at the beginning of the year. For the data from the Federal Statistical Office on GDP in the first quarter, which is due on Friday, experts expect an increase of 0.2 percent after the economy shrank by 0.3 percent at the end of 2021.
As a result of the Ukraine war, the federal government is assuming significantly weaker growth in the German economy than assumed at the beginning of the year. As Reuters learned in advance, the government only expects growth in gross domestic product (GDP) of 2.2 percent for 2022 – 1.4 percentage points less than before.
SOARING INFLATION
At the same time, the government is preparing for skyrocketing inflation this year. According to a document on the spring forecast available to Reuters on Monday, the inflation rate is likely to be 6.1 percent – after 3.1 percent last year. Federal Minister of Economics Robert Habeck (Greens) will present the projection on Wednesday.
According to insiders, given the high inflationary pressure, the European Central Bank is heading for an imminent interest rate hike. The first step could be taken as early as July, and it should be in September at the latest, Reuters learned from insiders.
The pressure on the central bank to act has recently increased. As a result of skyrocketing energy prices, inflation in the euro area shot up to 7.4 percent in March – and is well above the target of the currency holders. The ECB is aiming for 2.0 percent inflation as the optimal level for the economy in the euro zone. In Germany, the inflation rate was 7.3 percent. A slightly lower reading of 7.2 percent is expected for the April data due on Friday.