In Germany, business sentiment improved slightly in April, but the data from the Ifo Business Climate is not a real step forward: the index rose by 0.2 points compared to the previous month to 96.8 points, according to the Munich institute. After all, this is the highest value since June 2019. However, experts had expected a stronger increase to an average of 97.8 points. Nevertheless, the third rise in the leading indicator in a row is usually interpreted by economists as an economic turning point. The data also shows that the companies rated their current business situation better. The prospect of the coming six months, however, has clouded over.

Ifo Business Climate Index April 2021

The effect of the third wave

“The third wave of infections and bottlenecks in preliminary products are dampening the recovery of the German economy,” commented Ifo President Clemens Fuest. As in the past few weeks, the results vary depending on the sector. Things are still going very well for the industry, but optimistic expectations have been dampened. “45 percent of the companies reported bottlenecks in preliminary products – that is the highest figure since 1991,” emphasized Fuest. In manufacturing, however, the business climate improved to its highest level since May 2018. Capacity utilization increased significantly to 86.2 percent and is thus above the long-term average for the first time in almost two years. The industry is booming, but the bottlenecks in intermediate products such as semiconductors are the downside, said Ifo economic expert Klaus Wohlrabe. There is sand in the gears when it comes to procurement, across almost all industries.

Service sector worries

In the service sector, the mood clouded over again somewhat. The companies were less satisfied with their current situation. “Even the optimism that had recently emerged has disappeared again.” While the logistics sector is benefiting from the upswing in industry, the hospitality and tourism sectors in particular suffered from the lockdown. In the retail sector, the business climate picked up slightly – not least because of the better location at car dealerships, for example. With a view to the coming months, however, pessimism has noticeably increased again. According to the Ifo, the mood among companies also deteriorated in the construction industry.

Bottlenecks and delivery problems

“The catching-up process is stalling a bit,” commented Jens-Oliver Niklasch, economist at LBBW. Probably this has to do with the uncertain development of the pandemic and the response of politics to it – keyword “Easter rest”. Michael Holstein, chief economist at DZ Bank, said the current survey shows that the export-driven boom in German industry is continuing. “Due to the global demand for industrial goods, the bottleneck is noticeable in important intermediate products such as memory chips. It could take months to overcome the delivery problems, which is why the outlook is somewhat gloomy.” “The recovery should only gain real momentum when the lockdown is noticeably relaxed, which we expect from the end of May,” commented Jörg Kramer, chief economist at Commerzbank. Then consumers would probably dissolve part of the forced savings, which, according to our estimates, now amount to seven percent of their annual income.

On average, consumers spent at least 1250 euros less on consumer spending last year. This is the result of calculations by the Institut der Deutschen Wirtschaft (IW). In total, this corresponds to a decrease of 116 billion euros, according to a study by the employer-related research institute. The percentage decline in spending was 6.1 percent compared to 2019, the biggest slump in 70 years. “Short-lived consumer goods” such as clothing or shoes were particularly hard hit by the decline, according to the study. The purchase of durable consumer goods such as cars or furniture also declined in the course of the first lockdown, but demand in the second half of 2020 increased by five percent compared to the previous year. The temporary VAT cut could also have had a stimulating effect on consumption.

Service providers hit particularly hard

The service sector was hit particularly hard by the lockdown measures in 2020. In 2020 as a whole, the decline totaled 78 billion euros, according to the IW. That is more than two percent of the German gross domestic product. “The state-decreed closure of body-related services, restaurants, hotels, leisure and event facilities have made many consumer wishes impossible,” said IW scientist Hubertus Bardt. The data confirm a study by the Federal Statistical Office in March. This had also indicated that the development in the Corona crisis differs significantly from that in the financial and economic crisis of 2008/2009. At that time, private consumption was less affected and even proved to be a pillar of the German economy.

It will continue to save

The researchers do not yet see a fundamental recovery in the propensity to consume in German private households. For the first quarter of 2021 they put the consumption shortfall at a further 40 to over 60 billion euros. According to a survey carried out by the IW together with other research groups, 43 percent want to save the part of their income that remains after basic expenses. Usually it is less than 30 percent. In addition, only a third of those surveyed stated that they currently plan to spend on vacation – usually 45 to 50 percent.