Tariff risks threaten fragile improvement in German business sentiment

By Miranda Murray and Rachel More

BERLIN (Reuters) -German business morale unexpectedly rose in April, a survey showed on Thursday, though expectations were gloomier as companies remain uncertain about how the tariff war escalation with the United States will play out.

The Ifo institute said its business climate index rose to 86.9 in April from 86.7 in March, beating forecasts by analysts polled by Reuters for a decrease to 85.2.

The expectations index fell to 87.4 from 87.7, according to the Munich-based institute's monthly survey of some 9,000 companies. However, this was better than a drop to 85.0 expected by analysts.

"Uncertainty among companies has increased. The German economy is preparing for turbulence," said Ifo president Clemens Fuest.

Germany's likely future coalition parties agreed a massive surge in borrowing in March to boost the anaemic economy, but economists have said it will not provide a quick fix this year.

"Significantly improved business expectations in the construction industry - probably thanks to the infrastructure package - and stable future expectations among service providers are currently almost offsetting the slump in industry as well as in wholesale and retail," said Deka analyst Andreas Scheuerle.

Analysts said the index's rise was a positive surprise but were cautious about the optimism reflected in the results.

"There are currently more unknowns than knowns for the German economy," saud ING's Carsten Brzeski, who warned that the Ifo index has a long track record of delayed responses to political events in its readings.

KfW's Dirk Schumacher said companies found themselves between hope and fear when it comes to the U.S. tariffs, with some optimism that an agreement can still be found.

"At the same time, confidence seems to be very muted."

The tariffs announced by U.S. President Donald Trump have caused uncertainty globally, and export-oriented Germany, the United States' biggest trading partner, will be the biggest European loser in a trade war.

Business activity in Germany's private sector contracted in April, hurt by service sector woes and trade-related uncertainty, although manufacturers are showing some resilience, the Purchasing Managers' Index (PMI) showed on Wednesday.

The trade tensions come alongside a slowdown in German industry, with automobile giant Volkswagen and electronics manufacturer Bosch among the companies cutting jobs as high costs and stiff competition from abroad weigh on businesses.

LBBW analyst Elmar Voelker said the survey, while not a reason to celebrate, signalled that the German economy would not slide into a serious recession anytime soon.

The German government is set to downgrade its economic forecast for 2025 later on Thursday, a source told Reuters earlier this week, with Europe's largest economy now seen as stagnating this year.

Germany was the only G7 economy that failed to grow for the last two years, and if the forecast stands, it would mark the third year without growth for the first time in history.

(Reporting by Rachel More, Miranda Murray and Klaus Lauer; editing by Kirsti Knolle and Toby Chopra)