German Business Morale Soars to Record High

German business confidence hit a record high in November putting Europe’s largest economy on track for a boom, the Ifo economic institute said on Friday, allaying some concerns about political instability over forming a new government.

Ifo said 90% of responses to its monthly survey of some 7,000 firms came before the collapse late on Sunday of talks on forming a three-way coalition. But the Nov 6 to Nov 23 survey period did come as questions were being raised about what kind of government would come, Reuters reported.

The institute’s chief delivered an upbeat outlook. “The German economy is on track for a boom,” Ifo president Clemens Fuest said in a statement, forecasting economic growth of 0.7 percent in the final quarter of this year after 0.8% in the July-September period.

The Munich-based institute said its business climate index rose to 117.5 from an upwardly revised reading of 116.8 in October. This was higher than a Reuters consensus forecast for a value of 116.6.

A business expectations reading surged to 111.0 from 109.2. The business confidence reading caps a positive batch of German economic data this week.

Looking at the Ifo index in detail, manufacturing firms, retailers and wholesalers were all more cheerful about their prospects. Only construction companies scaled back their expectations "which nevertheless remain at a high level", Ifo said.

On Thursday, official data showed exports and rising business investments were the main drivers of growth in the third quarter, signaling that the robust upswing will extend well into next year.

Markit’s flash composite purchasing managers’ index, released on the same day, also showed an economy firing on all cylinders as factories churned out goods at the fastest pace in nearly seven years in November.

Accordingly amid record-high employment, rising real wages and an increase in exports, the German government last month raised its economic growth forecast for 2017 from 1.5 to 2%, while Ifo lifted its estimate from 1.9 to 2.3%.

The index is based upon about 7,000 monthly survey responses from firms in the manufacturing, construction, wholesaling and retailing sectors. The firms are asked to give their assessments of the current business situation and their expectations for the next six months. To make the statistics comparable, all figures are normalized to the average of the base year 2005.

In the wider eurozone, economic growth is powering ahead, with the European Central Bank claiming credit for the most synchronized upswing since the single currency was founded almost two decades ago. A purchasing managers index measuring private-sector activity accelerated in November after new orders surged the most in more than 6-1/2 years, and companies added jobs at one of the fastest rates in at least two decades. While the ECB says its extraordinary monetary stimulus is driving growth, policy makers are considering plans for gradually withdrawing some of their support.

  Political Uncertainty

Overshadowing the strong numbers is political uncertainty after conservative Chancellor Angela Merkel failed to form a coalition government with the pro-business Free Democrats and the ecologist Greens.

But easing that somewhat, a senior member of the center-left Social Democrats said early on Friday they are ready to hold talks with other parties on breaking political deadlock.

President Frank-Walter Steinmeier, who is trying to broker a deal, is keenly aware the source of Germany’s international clout is its economic power and that businesses want a stable coalition soon to end the uncertainty and avoid another poll.

Steinmeier met SPD leader Martin Schulz for talks on Thursday and will meet parliamentary party leaders next week as he pushes political leaders to forge a deal and avoid new elections.

“Looking ahead, filled order books and low inventories should keep the manufacturing sector an important growth engine,” said Carsten Brzeski, chief economist at ING-Diba AG in Frankfurt.

“However, the fiscal stimulus which we had previously expected, will now clearly be delayed—though not aborted—due to the political impasse in Berlin,” he added.

“The current situation in Germany is an excellent illustration of a phenomenon which has characterized the entire eurozone throughout the year: buoyant confidence and strong economic growth goes hand in hand with political uncertainty and instability,” said Brzeski. “This dichotomy can easily continue in 2018.”