German business morale brightens despite coronavirus resurgence

FILE PHOTO: A worker wears a protective mask at the Volkswagen assembly line after VW re-starts Europe's largest car factory after coronavirus shutdown in Wolfsburg, Germany, April 27, 2020. Swen Pfoertner/Pool via REUTERS

BERLIN (Reuters) - German business morale improved for the fifth month in a row in September, a survey showed on Thursday, in a further sign that Europe’s largest economy is enjoying a solid recovery from the coronavirus shock suffered in the first half of the year.

The Ifo institute said its business climate index rose to 93.4 from a downwardly revised 92.5 in August. This was the highest reading since February when the index stood at 95.9.

“The German economy is stabilizing despite rising infection numbers,” Ifo President Clemens Fuest said in a statement, adding that companies once again assessed their current business situation more optimistically than in the previous month.

The German economy contracted by 9.7% in the second quarter as household spending, company investments and trade collapsed at the height of the COVID-19 pandemic. The government has since March unleashed an array of rescue and stimulus measures, financed with record new borrowing, to cushion the impact.

In a sign that Berlin’s massive response to the crisis, including job protection schemes and a temporary VAT cut, seems to be paying off, business morale in manufacturing improved considerably on upbeat export expectations, the survey showed.

In the service sector, however, sentiment fell for the first time in five months. Ifo economist Klaus Wohlrabe said business morale in tourism and hospitality had deteriorated again due to the rising numbers of coronavirus infections in recent weeks.

For the third quarter, Ifo now expects the German economy to grow by 6.6% on the quarter, Wohlrabe said, adding that growth would likely slow to 2.8% in the fourth quarter.

KfW chief economist Fritzi Koehler-Geib said the Ifo figures showed that the easy part of the recovery was over now as infections were also on the rise in many other countries that are important trading partners for German manufacturers.

“Both health policy and economic policy efforts must now focus on ensuring that the economic improvement continues at a satisfactory pace even after the expected record GDP growth in the third quarter,” Koehler-Geib said.

Reporting by Michael Nienaber and Rene Wagner, editing by Emma Thomasson and Paul Carrel