German business morale improved to a two-year high in May, as COVID-19 brakes were relaxed and infections fell, heralding a rapid summer recovery after the economy contracted more than expected in the first quarter.
As many companies report a build-up of supply bottlenecks, Tuesday’s Ifo Business Climate Index reading showed a jump to 99.2, from April’s revised 96.6 and surpassing the forecast of 98.2 in a Reuters survey of analysts.
“The German economy is accelerating,” said Ifo President Clemens Fuest.
The survey of some 9,000 companies in manufacturing, services, trade and construction showed that companies were more satisfied with their current situation and optimistic for the next six months.
He pointed to a quarterly growth rate of 2.6% from April to June and 2.8% from July to September, Ifo economist Klaus Wohlrabe told Reuters.
In the first quarter, GDP contracted by 1.8% quarter on quarter and 3.1% over the year, readings significantly lower than the euro area average, according to data from the Federal Office statistics earlier Tuesday.
Coronavirus brakes in effect in those months have also prompted consumers to invest more money than ever in savings, with the savings rate hitting an unprecedented 23.2%.
German household disposable income edged up as the government invested billions of euros in job protection programs and additional family allowances, but household spending fell 5.4% in the quarter, the brakes linked to the control of the pandemic having slowed down consumption.
VP Bank Group economist Thomas Gitzel called the drop “colossal,” but also said falling infection rates and advances in vaccinations meant the economy would soon be back on a more base. healthy because the restrictions were relaxed and then completely lifted.
“We are heading into a relaxed summer in which retailers in German cities can expect consumers to splash,” he said.
Business investment in machinery and equipment edged down in the first quarter, although construction activity increased, according to GDP data.
Wohlrabe said rising costs due to supply bottlenecks in manufacturing and construction were increasingly being passed on.
In the construction sector, two out of five companies reported difficulties in procuring raw materials, and “more and more companies are indicating that they wish to increase their selling prices,” he said.
KfW bank economist Fritzi Koehler-Geib said his bank had raised its 2021 growth forecast to 3.5% from 3.3% “despite a bad start to the year.”
Commerzbank economist Joerg Kraemer said his bank continued to expect German GDP growth of 4.0% in 2021.
“A post-corona boom is emerging – even if the air is starting to become scarce in the manufacturing sector, where the business climate is already at a very high level,” he added.
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