(Bloomberg) — Germany’s business outlook rose for a fourth month as confidence builds that the country’s economic rebound will strengthen over the rest of the year.
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An expectations gauge by the Ifo institute rose to 90.4 from a revised 89.7 the previous month — less than economists had estimated in a Bloomberg survey. A measure of current conditions fell, according to a statement published Monday.
“It’s not yet a full recovery,” Ifo President Clemens Fuest told Bloomberg Television. “The German economy is improving, but slowly,” he said, noting better performances for manufacturing and construction.
Europe’s biggest economy dodged a recession over the winter, thanks in part to mild weather that boosted construction and helped lift gross domestic product by 0.2% in the first quarter. Other indicators show momentum building in other sectors, putting the recovery on a more solid footing.
Private-sector activity expanded at the fastest pace in a year in May, according to surveys by S&P Global. While the pickup was again driven by buoyant services, the weakness in the crucial manufacturing industry abated.
Consumers are expected to drive a gradual revival in the coming quarters as they benefit from cooling inflation and strong wage gains. Negotiated pay jumped by more than 6% in the first quarter, the Bundesbank said this week, while inflation is expected to have remained below 3% in May.
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“Recent survey data suggest the road to recovery for Germany’s economy will continue to be long and bumpy. Overall, the unchanged May reading of the Ifo business climate and the higher PMI gauge support our view of a stronger dynamic in the second half of the year, while activity in the current quarter might still be subdued.”
—Martin Ademmer, economist. Click here for full REACT
“Private consumption is a puzzle to some extent because we see disposable incomes improving” but households appear to be saving more, Fuest said. “What we hope for is an improvement in consumption demand this year. It’s just not forthcoming.”
Factories may also benefit from rising exports and lower interest rates, though the latter may take time to be felt as central banks take a cautious approach to loosening monetary policy. The European Central Bank is widely expected to decide on a first rate cut in June, while the path thereafter remains unclear and investors have recently pared back bets on how much easing it’ll deliver this year.
In an interview with the Financial Times published Monday, ECB Chief Economist Philip Lane confirmed the intention to reduce borrowing costs next month as inflation and wage growth recede, but warned that policy would remain tight.
“The best way to frame the debate this year is that we still need to be restrictive all year long,” he said. “But within the zone of restrictiveness we can move down somewhat.”
Fuest said pay pressures will remain because labor markets continue to be tight.
“One answer to that is increases — this is a risk for inflation and at the same time we need those wage increases to make sure workers go where they are most productive,” he said. “This is going to be challenging for monetary policy. So I think maybe rates will stay high for longer.”
–With assistance from Joel Rinneby and Kristian Siedenburg.
(Updates with Bloomberg Economics after sixth paragraph.)
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