Ifo’s closely watched business sentiment index beat analysts’ expectations to rise to 108.3 points in January from 107.3 points in December.
The index “improved for the third time in succession. Although companies assess the current business situation as less favourable than in December, their business expectations have brightened considerably,” said Ifo president Hans-Werner Sinn.
“The German economy has started the year positively,” Sinn said.
Ifo calculates its headline index on the basis of companies’ assessments of their current business and the outlook for the next six months.
While the sub-index measuring current business declined to 116.3 points in January from 116.7 points in December, the outlook sub-index rose to 100.9 points, its highest level since July 2011.
Analysts had been expecting a much more modest increase in business confidence this month and so they saw the new data as a sign that Germany – where growth shuddered to a halt in the last quarter of last year – will successfully skirt a recession.
“Did anyone say recession? Today’s Ifo index shows that the German economy only made a short stopover at the end of last year and is now heading towards expansion again,” said ING senior economist Carsten Brzeski.
Precise gross domestic product (GDP) for the final quarter of 2011 are not yet available. But earlier this month, the national statistics office Destatis estimated that GDP likely shrank by “around a quarter of a percentage point” in the period from October to December as the eurozone debt crisis increasingly puts the brakes on growth.
Recession is technically defined as two consecutive quarters of negative growth. But with domestic demand now taking over as the engine of the traditionally export-oriented German economy, experts and the government are confident that the lull in economic activity will prove only temporary and pick up again this year.
Other forward-looking indicators, such as the ZEW barometer of investor confidence and the purchasing managers’ index, similarly point to the ongoing resilience of the German economy.
Companies were better prepared to weather the current storms following the deep restructuring they had undertaken in recent years and Germany, as one of the world’s biggest exporters, would be one of the main beneficiaries if the economic recovery in the United States proved to be sustainable, said ING’s Brzeski.
Furthermore, if the mild winter weather persisted enabling the construction sector to become an important growth driver, “negative growth in the fourth quarter should have only been a blooper,” the analyst argued.
Christian Schulz, senior economist at Berenberg Bank, also saw that “despite the European confidence crisis, the fundamental situation of the German economy remains very strong.”
Historically high employment levels as well as healthy public finances and company balance sheets were making Germany “less dependent on the traditionally strong export sector,” he said.
And while Germany “cannot decouple the weakness of its most important export markets in the eurozone, resilient domestic demand can cushion the blow,” he said.
If the debt crisis did not deteriorate further, “Germany and with it the eurozone overall can return to healthy growth in the second quarter, swiftly leaving a mild winter recession behind,” he said.
Jennifer McKeown, senior European economist at Capital Economics, was less optimistic.
“January’s rise in the German Ifo index suggests that the economy is holding up relatively well, but activity is nowhere near strong enough to provide a meaningful boost to the eurozone’s periphery,” she said.
“With global demand growth still very weak and the euro at a pretty high level, we see the export-reliant German economy stagnating at best this year. And if the peripheral debt crisis deepens and Germany is dragged in further as we expect, there will be worse to come in 2013,” she warned.