The recovery in the German economy is very weak

The latest confidence indicators for Germany still point to a very lackluster recovery in the German economy following the cyclical bottom-up at the beginning of the year. The Ifo index, Germany’s most valuable leading indicator, fell from 89.3 in May to 88.6 in June. The weakening of business confidence after three consecutive increases at the beginning of the year shows that a strong recovery will not automatically follow the cyclical bottom. Today’s weakening of the Ifo index is due solely to a decline in expectations, while the current valuation component remains unchanged, albeit at a lower level.

Reality check for optimists

Optimism at the beginning of the year gave way to realism. Latest PMI and Ifo information showed that the German economy is still struggling to gain further momentum. In particular, the sharp decline in the manufacturing PMI index on Friday underlined the still not very promising situation of the German industry. In fact, the return of the stock cycle that we have all been hoping for since the beginning of the year still hasn’t happened.

In fact, inventory levels have remained stable at high levels for several months and order books have become quite thin. More worryingly, the weakness extends beyond the industry. Despite strong nominal price growth and somewhat improving consumer sentiment, private consumption has now no longer emerged as a growth factor. As a result, the German economy is now unlikely to gain momentum in the second quarter.

Possibility of a strong recovery this year is low

Looking ahead, despite today’s cold shower, the German economy is expected to gain some momentum throughout the summer months. Although it will take a little longer than we think, strong price growth should support a cautious recovery in private consumption and even the stock cycle should gradually start to turn positive. However, the recently announced data once again emphasized that it will not be easy for the German economy to cope with the ongoing difficulties. Increasing bankruptcies and restructuring announcements from individual companies continue to hang like the sword of Damocles on the labor market this year. In addition, the current political uncertainty resulting from the government’s budget negotiations and the known structural weaknesses of the economy will limit the speed of any recovery. The possibility of a strong recovery this year is quite low.