Business sentiment in Germany strengthens slightly

Investor sentiment brightened modestly in Germany this month, a closely-watched survey showed on Friday, despite the economy continuing to falter.

The latest Business Climate Index from the ifo Institute nudged up to 85.5 in February, in line with expectations, from 85.2 a month earlier.

While the index for the current economic situation remained unchanged at 86.9, expectations improved slightly, rising to 84.1 from 83.5.

The ifo said: "The German economy is stabilising at a low level."

Expectations in the service sector were still pessimistic, though they were an improvement on January. The business climate index for construction also rose slightly.

But the index for manufacturing fell, with assessments of the current situation their lowest since September 2020. "Expectations are virtually as pessimistic as they were the previous month," the ifo said.

"The decline in the order backlog continues unabated. Companies have announced further cuts to production."

The German economy, which is heavily reliant on the manufacturing sector, shrank by 0.3% in the last quarter of 2024. Most economists now expect it to enter a technical recession next month.

Europe’s largest economy has been rocked by surging energy costs in the wake of Russia’s invasion of Ukraine, record inflation, higher interest rates and weak global demand.

On Thursday, the HCOB composite PMI for February came in at 46.1, down on January’s 47.0 and below forecasts for 47.5. The government also slashed its growth forecast for 2024 to 0.2% from 1.3%.

Claus Vistesen, chief Eurozone economist at Pantheon Macroeconomics, said: "This is a slightly more upbeat headline that Thursday’s awful PMIs, but it isn’t great.

"The continued increase in the expectations index is good news, but broadly, these data continue to signal difficult economic conditions in Germany with zero or even negative growth in the first quarter."

The ifo Business Climate Index is based on around 9,000 monthly responses from firms in manufacturing, services, trade and construction.