The mood is brightening: the Ifo business climate index has risen to its highest level in two years. In the first quarter, however, the economy will contract more sharply than previously assumed.

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Dhe mood among companies in Germany is brightening unexpectedly, given the progress made in vaccination and the falling number of corona infections. The Ifo business climate index climbed to 99.2 points in May from 96.6 points in April and thus to the highest value since May 2019, as the Munich economic research institute announced on Tuesday for its manager survey. Analysts had expected a weaker increase to 98 points. “The German economy is picking up speed,” said Ifo President Clemens Fuest. Managers have assessed both their current situation and the business outlook for the next six months as more favorable than recently.

The business climate improved in all areas considered, even in the trade and services sectors, which were severely affected by the Corona restrictions. “Optimism returned, especially in the hospitality and tourism sectors,” explained Fuest. Wholesaling continues to benefit from the good industrial economy, retailers are hoping for further corona easing.

The mood also brightened at the building site. However, the problem of material shortages has worsened again, said Fuest. There are currently delivery bottlenecks for many raw materials and intermediate products, which are due, among other things, to problems in international trade due to the corona pandemic.

“Expectations explode”

“Expectations in the tourism and hospitality sector exploded in May,” said Ifo economist Klaus Wohlrabe in view of the first easing of falling incidences and significant progress in vaccination. “There is hope for good summer business here.” The German key industries such as mechanical engineering, electrical engineering and the chemical industry are still very well positioned. The export business continues to run smoothly.

“The downside are the high purchase prices for primary products and raw materials,” said Wohlrabe. “Rising costs are increasingly being passed on: More and more companies state that they want to increase their sales prices.” This should also have an impact on consumer prices.

“Corona ticked off gradually”

“As bitter as the recent economic setbacks in the first quarter were, they were the last for the time being,” says VP Bank’s chief economist, Thomas Gitzel, with certainty. “The sharply falling incidence values ​​and the advancing immunization of broad sections of the population will make easing possible. A relaxed summer is emerging that will make the tills ring in German city centers. “

“Corona is being ticked off by companies,” said LBBW economist Jens-Oliver Niklasch. Expectations have already become firmly established and the situation is gradually following suit. “The recurring reports about material bottlenecks and blatant price increases do not seem to change anything. Of course, you have to judge everything very carefully because there remains a residual uncertainty in the matter of the pandemic. “

Back on the growth path

According to the Bundesbank, the German economy is returning to growth. The gross domestic product (GDP) should therefore increase significantly again in the second quarter. In its recently raised forecast, the federal government anticipated 3.5 percent growth in the German economy for the year as a whole.

In the first quarter, GDP shrank by 1.8 percent due to the corona-related slump in consumption, as the Federal Statistical Office announced on Tuesday. The economic downturn turned out to be somewhat stronger than initially assumed. In a first estimate, the Wiesbaden authority had assumed a decrease of 1.7 percent.

Private consumption slowed

The renewed restrictions in the course of combating the coronavirus slowed private consumption, which is normally a reliable pillar of the domestic economy. Private consumer spending slumped 5.4 percent compared to the previous quarter. The expiry of the VAT cut at the turn of the year also had a dampening effect. Consumers had brought purchases forward to the second half of 2020 because of the lower tax rates. These purchases were now missing from the consumption statistics for the first three months of the current year.

The companies invested somewhat less in machines, devices and vehicles (minus 0.2 percent). Foreign trade, on the other hand, benefited from rising global demand. However, imports of goods and services (plus 3.8 percent) rose significantly more than exports (plus 1.8 percent).

After the crash at the beginning of the Corona crisis in spring 2020, Europe’s largest economy initially recovered and grew, in some cases strongly, for two quarters in a row. Economists assume that the German economy will quickly pick up speed again. More and more people are vaccinated against the coronavirus, and restrictions are increasingly being relaxed again.