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Drop in German Business Outlook Shows Recovery Not Assured

Carolynn Look
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Drop in German Business Outlook Shows Recovery Not Assured

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German business expectations took a surprising turn for the worse at the start of the year, underscoring the challenges Europe’s largest economy faces in exiting a protracted slowdown.

The unexpected drop in the closely watched Ifo confidence index puts a dent in some of the optimism about Germany after stronger-than-forecast manufacturing figures on Friday. But the latest report was mixed rather than wholly negative. January’s decline was driven by dwindling prospects in services and construction while manufacturing improved.

The euro was little changed at $1.1023 at 12:40 p.m. Frankfurt time, having earlier weakened in the wake of the Ifo report.

The German economy is only slowly finding its feet after 2019’s manufacturing slump, and policy makers have been hoping that rising optimism among companies would lead to a broader recovery. Surveys published last week showed that factory activity in the euro area is still shrinking, though at a slower pace.

“The stabilization we saw in manufacturing last year is continuing, and because manufacturing is so important to the German economy we take this overall as a good sign despite the decline in the overall index,” Ifo President Clemens Fuest said in a Bloomberg TV interview.

What Bloomberg’s Economists Say

“Manufacturing is recovering from a substantial shock. A big rebound remains unlikely while industry grapples with structural issues that take time to work through. But we expect Germany’s economy to expand slightly faster in 4Q than the 0.1% growth rate recorded in 3Q. And some further acceleration can be expected this year as sentiment improves.”

-- Jamie Rush. Read the GERMANY REACT

Yet there’s still some way to go amid continued risks to growth that’s sluggish at best. The Chinese economy, one of Germany’s top three trading partners, is slowing, and President Donald Trump’s threat of tariffs on European cars is still looming large. That would hit Germany -- home to Volkswagen, the world’s largest carmaker -- particularly hard.

Fuest sees a trade war and a sharper slowdown in China as the biggest threats.

“China continues to be a very important market for Germany, has a huge impact on the global economy,” he said. “That is the major threat -- more I would say than the threat of a trade war with the U.S.”

Last week, the European Central Bank expressed hopes about signs of stabilization in the 19-nation euro area, citing easing global trade tensions following a U.S.-China deal on trade and a mildly expansionary fiscal policy. In Germany, government spending on infrastructure is close to record levels, according to Finance Minister Olaf Scholz, after the country ran budget surpluses for the past six years.

(Updates euro in third paragraph)

--With assistance from Harumi Ichikura, Kristian Siedenburg and Francine Lacqua.

To contact the reporter on this story: Carolynn Look in Frankfurt at clook4@bloomberg.net

To contact the editors responsible for this story: Paul Gordon at pgordon6@bloomberg.net, Jana Randow, Fergal O'Brien

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