Companies significantly more confident after third corona wave

“The German economy is picking up speed,” is how Ifo President Clemens Fuest describes his institute’s latest economic survey. The Ifo researchers have identified a mood in Germany’s companies that is better than it has been for two years – thanks in part to progress on vaccination. The Ifo business climate index climbed to 99.2 points after 96.6 points in the previous month, according to the Munich-based economic research institute. Economists had expected only 98.2 points. Companies are also much more optimistic about the coming months – especially in the service and trade sectors.

In the manufacturing sector, on the other hand, sentiment rose only slightly, and the mood in the construction sector also brightened only slightly. The problem of material shortages has worsened again, explains Fuest. There are currently supply bottlenecks for many raw materials and intermediate products – partly due to pandemic-related problems in international trade.

In the service sector, the Ifo survey showed the highest value since February 2020. Expectations in the tourism and hospitality sector virtually exploded in May, explains Ifo expert Klaus Wohlrabe, adding that there is hope here for good summer business. The index also rose significantly in the retail sector: Retailers were more satisfied with their current business situation. In addition, “cautious optimism” returned to expectations, according to Ifo. “While wholesalers continue to benefit from the good industrial economy, retailers are hoping for further easing,” Ifo President Fuest said of the survey, for which the institute surveys a total of around 9,000 companies every month. In the process, they are asked to assess their current business situation and give their expectations for the next six months.

According to the Bundesbank, too, the German economy is currently recovering rapidly after the recent corona slump. Accordingly, gross domestic product (GDP) is expected to increase significantly again in the second quarter. At the beginning of the year, however, GDP contracted more sharply than initially assumed – by 1.8 percent – due to the corona-related slump in consumption. The third wave of corona has probably been broken and business sentiment is rising in line with the progress of the vaccination, commented KfW‘s chief economist Fritzi Köhler-Geib on the development.

However, the brightening of sentiment should still be interpreted with caution, warns chief economist Alexander Krüger of Bankhaus Lampe. There are still supply chain problems, and for the time being the economy remains more dependent on stimulus from China and the USA than it was before the crisis. “In 2020, the problem was mainly weak demand; that has now turned around. Demand clearly exceeds supply for semiconductors, for example,” notes Gunther Kegel, president of the German Electrical and Electronic Manufacturers’ Association (ZVEI). According to a survey, 60 percent of ZVEI members are therefore in favor of establishing and expanding microelectronics production facilities to ensure supply security in Europe. After all, the industry is currently experiencing problems with procurement bottlenecks for inputs. Among other things, there are supply problems with microchips, plastics, steel and copper. “If anything, we expect the shortages in electronics to worsen in the coming weeks, and our supply chains to normalize in the third or fourth quarter of 2021.”

In addition to the bottlenecks, tight transport capacities are making themselves felt not only in the electronics industry, leading to higher costs. Despite the challenging conditions, however, ZVEI member companies are cautiously optimistic about 2021, expecting production growth of five percent compared to 2020 and, with capacity utilization of 82 percent, almost back to the previous year’s level, said Kegel.