German business sentiment hits two-year high - Ifo

German business sentiment hit a two-year high in May, according to a survey released on Tuesday by the Ifo Institute.

The business climate index rose to 99.2 from a revised 96.6 in April. This was above consensus expectations for a reading of 98.0 and marked the highest value since May 2019.

The current situation index printed at 95.7 in May from 94.2 the month before, while the expectations index ticked up to 102.9 from 99.2.

Ifo President Clemens Fuest said: "The German economy is picking up speed."

The manufacturing gauge nudged up to 25.7 from 25.1, while the index for the services sector jumped to 13.7 from 3.5. The index for trade improved to 8.4 from -0.05 and the gauge for construction increased to 2.8 from 0.7.

Claus Vistesen, chief eurozone economist at Pantheon Macroeconomics, said the IFO continues to signal that a solid rebound in economic activity is now underway, indicating that headline GDP growth will snap back significantly in the second quarter, after plunging in Q1.

Capital Economics said the improvement in sentiment was "hardly surprising given the improvement in the covid numbers, the steady lifting of restrictions and the optimism provided by the vaccine rollout".

However, Europe economist Jessica Hinds also cautioned: "One concern is that supply chain difficulties and rising commodity prices, which have hampered German industry and construction so far this year, will persist.

"The Ifo Institute noted that more companies say they are passing on higher input prices and are planning price rises. This supports our view that we are likely to see further rises in inflation this year, although they are likely to be reversed in 2022."