FRANKFURT: The German government is expected to raise its latest growth forecasts on Wednesday as Europe’s crisis-hit top economy shows tentative signs it is finally turning a corner. Improvements in key indicators, from industrial output to business activity, in recent months suggest that a hoped-for recovery may be slowly under way. The German economy shrank slightly last year, hit by soaring inflation, a manufacturing slowdown and weakness in trading partners, and has acted as a major drag on the 20-nation euro-zone.

Initial hopes for a strong rebound this year were dialled back as the economy languished, with Berlin in February slashing its growth forecast to just 0.2 percent. The International Monetary Fund followed suit last week and is now expecting the same figure. But improving signs have fuelled hopes the lumbering economy - while not about to break into a sprint - may at least be getting back on its feet. On Wednesday, a closely-watched survey from the Ifo institute showed business sentiment rising for a third consecutive month in April, and more strongly than expected.

ING economist Carsten Brzeski said the survey pointed to “the return of optimism”, and “strengthens the view that the German economy has left the trough behind”. Last week the central bank, the Bundesbank, forecast the economy would expand slightly in the first quarter, dodging a recession, after earlier predicting a contraction. And on Tuesday a survey showed that business activity in Germany had picked up.

The HCOB Flash Germany purchasing managers’ index published by S&P Global registered a figure of 50.5 in April, up from 47.7 in March, returning to growth for the first time in 10 months. Any reading above 50 indicates growth, while a figure below 50 shows contraction. But slight improvements in indicators do not mean the government will make any big changes to its forecasts, with analysts still expecting tepid growth this year. Economy Minister Robert Habeck will present the new projections at 2:15 pm.

‘Recovery not assured’

Already facing turbulence from pandemic-related supply chain woes, the German economy’s problems deepened dramatically when Russia invaded Ukraine in early 2022 and slashed supplies of gas to Europe. This was a heavy blow for the country’s manufacturers - which still play a central role in the German economy, unlike in many other developed economies - which had come to rely on cheap Russian energy. While the energy shock has faded, continued weakness in key trading partners such as China has prolonged the pain.

Strikes in many sectors this year as workers pushed for better pay to combat inflation acted as a drag, as did higher interest rates as the European Central Bank has sought to tame runaway prices. Higher wages and other costs have also prompted some major companies to scale down production in Germany, fuelling fears of layoffs and manufacturing moving abroad. More long-term issues, such as an ageing population and a shortage of skilled labor, are also headaches for policymakers. Business groups complain they face hurdles in improving their prospects, from red tape to a failure to enact much-need reforms.

Disagreements in Chancellor Olaf Scholz’s three-party ruling coalition are also hindering efforts to reignite growth, and bolster the greener industries of the future, critics say. This week the pro-business FDP party, a coalition partner, faced an angry backlash from Scholz’s SPD when it presented a 12-point plan for an “economic turnaround”, which included deep cuts to state benefits. While the economy’s prospects may be starting to improve, a bumpy path ahead is still seen by some. A “far-reaching recovery is not yet assured”, said the Bundesbank in its latest monthly report.

Business morale

Meanwhile, German business sentiment rose for a third consecutive month in April, a key survey showed Wednesday, as hopes grow that a recovery is getting under way in Europe’s stuttering top economy. The Ifo institute’s closely-watched confidence barometer, based on a survey of around 9,000 companies, rose to 89.4 points, up from 87.9 points in March. The increase was slightly higher than analysts surveyed by FactSet had expected. The business climate reading rose across all sectors surveyed by Ifo - manufacturing, services, trade and construction.

“Sentiment has improved at companies in Germany,” Ifo president Clemens Fuest said in a statement. “The economy is stabilizing,” he added. The German economy shrank by 0.3 percent last year as it grappled with costly energy, high interest rates and weak demand from key trading partners. But signs are growing that a modest rebound has begun, partly thanks to improvements in industrial output and exports. The Bundesbank central bank last week said it now expected the economy to expand slightly in the first quarter of 2024, dodging a recession, after earlier predicting a contraction.

The latest Ifo reading “looks like a trend reversal”, said LBBW economist Jens-Oliver Niklasch. “One must remain cautious in difficult times, but at least there is now some evidence to suggest we saw the bottoming out of the economy in the winter,” he said. If the European Central Bank’s expected interest rate cuts “also provide a boost” in the months ahead, he added, then the German economy “should see a small increase in GDP this year”. The German economy ministry will unveil its updated growth forecasts later on Wednesday. — AFP