German business sentiment unexpectedly improves in January

By Maria Martinez

BERLIN (Reuters) -German business morale unexpectedly improved in January thanks to a more positive assessment of the current economic situation, a survey showed on Monday, although analysts said many companies remain pessimistic with uncertainty rife ahead of elections.

The Ifo institute said its business climate index increased to 85.1 in January from 84.7 in the previous month. Analysts polled by Reuters had forecast a reading of 84.7.

The current conditions index rose to 86.1 in January from 85.1 in December, while the expectations index fell slightly to 84.2 from 84.4.

Although the assessment of the current situation had improved, companies remain anxious about an uncertain future.

"Companies continue to be pessimistic," Ifo President Clemens Fuest told a press conference about the findings.

The expectations index is at its lowest level in a year, noted Carsten Brzeski, global head of macro at ING.

"It’s obvious that the results of the U.S. elections and policy uncertainty in Germany ahead of the upcoming elections are still weighing on sentiment," Brzeski said.

Across sectors, the Ifo index deteriorated in industry and construction, while it rose significantly for services and remained unchanged in trade.

Despite the rise in the main index, the German economy is clearly still struggling, said Franziska Palmas, senior Europe economist at Capital Economics.

She noted that the index remains very low compared to its average level in the pre-pandemic period and at face value is consistent with a sharp contraction in gross domestic product.

"With sentiment still weak, the election unlikely to bring with it much fiscal loosening, and struggles in industry set to continue, we think growth will remain subdued this year."

Germany will hold a snap national election on Feb. 23 after the collapse of Social Democratic Chancellor Olaf Scholz's three-way centre-left coalition.

Disagreements over how to save Europe's largest economy were the main factor behind the demise of the fractious coalition and the economy is the top concern of German voters, following two consecutive years of contraction.

The current improvement in business morale was presumably helped by U.S. companies importing more from Germany in anticipation of U.S. tariffs under new President Donald Trump, as well as falling interest rates and the hope that the next German government will finally deliver reforms and reduce red tape, said Jens-Oliver Niklasch, senior economist at LBBW.

Germany's opposition conservatives have a big lead in pre-election opinion polls.

The Ifo index echoed the Purchasing Managers' Index published on Friday, which showed that business activity in Germany's private sector stabilised in January, marking an end to a six-month contraction as services growth offset a continued decline in manufacturing output.

Overall, the key sentiment indicators are now showing signs of bottoming out, said COMMERZBANK-UNICREDIT-e68bffe8-949f-4244-b8ab-76fcfffe3e84>Commerzbank chief economist Joerg Kraemer.

"This supports the forecast that the German economy will pick up again somewhat from the spring. A significant upturn will require a fresh start in economic policy, although the potential future coalition partners unfortunately have different economic policy ideas."

(Reporting by Miranda Murray and Maria Martinez; writing by Rachel More; editing by Mark Heinrich)