German manufacturing returns to positive territory after 3 years

While business confidence for the future recovered in Europe's largest economy Germany, a long-awaited threshold was crossed on the industrial front. The Ifo Business Climate Index published by the Ifo Institute rose from 89.9 points to 90.2 points in October, continuing its increase for the 6th consecutive month and coming in above market expectations of 90.1.

The main driver of the increase in the headline data was a marked recovery in companies' forward-looking expectations. While the index of business expectations climbed from 90.4 points to 91.6 points, the index measuring current conditions fell from 89.5 points to 88.8 points. This widening gap between current operating conditions and expectations revealed that despite companies' dissatisfaction with present circumstances, they look toward the upcoming period with greater confidence, and that the recovery is progressing in an uneven structure.

What changed in the manufacturing sector after 3 years?

The clearest positive signal in the October survey came from the manufacturing industry. The manufacturing sector business climate balance rose from -2.7 points to +1.2 points, moving into positive territory for the first time after more than 3 years. While it was reported that manufacturers noted a tangible improvement in both current conditions and expectations, an increasing flow of new orders and plans to expand output served as the main drivers of this jump.

Where do the services and trade sectors stand?

A diverging picture was recorded in other sectors. The services sector dropped from +0.7 points to -1.2 points as companies became less satisfied with their current performance. The trade index remained flat at the -17.2 level as wholesale trade outperformed retail, while the construction sector recovered from -17.0 points to -15.5 points on the back of an improvement in current business assessments. Despite the rebound in industry, the loss of momentum in the services sector makes it essential for expectations to translate into tangible activity in the coming months for the revival in the German economy to broaden.

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