Hope returns to Germany as Ifo bounces back | Photographs

The cycle started to change for the better. Today's Ifo index provides further evidence of bottoming out in the German economy. Hard data for the first two months of the quarter already suggested the recession may have left more than expected. Strong activity in the construction sector on the back of mild winter weather and a technical recovery in trade and industrial production should offset still weak private consumption. This cyclical uptrend is likely to continue in the second quarter as well.

However, it should not be forgotten that many cyclical factors are still dragging down economic activity. Higher oil prices as a result of the military conflict between Iran and Israel, as well as ongoing tensions in the Red Sea, could again weigh on industry and exports. Also, rising bankruptcies and individual company announcements of upcoming job restructurings fuel the risk of labor market weakness this year. Finally, apart from possible cyclical headwinds, Germany's well-known structural weaknesses will not disappear overnight and will limit the pace of this year's rebound.

Overall, today's Ifo index is more optimistic for the German economy. The cyclical trough is behind us, but that doesn't mean a strong recovery is imminent because of structural weaknesses. A new danger of this cycle of progress is that it may lead to policy complacency.

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