UBS Economics-European Economic Comment _Germany ifo index - weak activit...-117440709

ab25 August 2025Global ResearchEuropean Economic CommentGermany: ifo index - weak activity but high hopes ifo index: expectations rise, current situation stagnatesThe August ifo index continues the familiar pattern seen over the last months: firms once again reported better expectations for the next six months, but state that the current situation has not improved. Taken together, the headline index (average of expectations and current situation) rose 0.4 points to its highest level since April 2024. The expectations component was up for the fourth month in a row by 0.8 points to 91.6 - the highest level since early 2022. By contrast, the current situation component has essentially stagnated for the past four months and at 86.4 is only slightly above the recent lows from autumn 2024. While the overall improvement in the ifo index is similar to last week's Composite PMI (Figure 2), there is a divergence in manufacturing, where the ifo is lagging the PMI (Figure 3). This divergence reflects the assessment of current output (Figure 5), with the 9000 firms surveyed in the ifo index reporting more muted current conditions than the 800 firms that contribute to the PMI. Overall, this suggests that Q3 activity could still be weak - even though the ifo index does not indicate a sharp headwind from the higher US tariffs agreed in early August. The ifo press release comments cautiously that "The German economy’s recovery remains weak." Sectoral detail: Still broad-based weaknessThe sectoral breakdown in the ifo index shows declines in the four main sectors manufacturing, services, retail/wholesale trade and construction. This contrasts with the increase in the overall index, owing to seasonal adjustment factors (the sector values are aggregated to the overall index using non-seasonally adjusted series, before applying seasonal adjustment to the overall index). Standing out in manufacturing was a sharp increase in sentiment amongst investment good producers, while in services architectural and engineering offices improved. This could point to first hopes for a positive effect of the fiscal package, in line with an improved outlook in construction (the ifo business cycle clock shows the strongest reading across all sectors, Figure 27).GDP outlook: US tariffs to dampen 2025, fiscal to boost 2026At 88.8, the Q3 average of the ifo index is above its Q2 average (87.6), suggesting somewhat better growth this quarter. However, the same was true in Q2 and still GDP, according to the latest revision by destatis, contracted by 0.3% q/q. The relative stability of the current conditions component may be a better gauge to near-term activity and our forecast is for a 0.2% q/q drop in GDP in Q3 as US tariffs hit activity. Our annual 2025 growth forecast is +0.2%. Starting in 2026, we expect the fiscal package (21% of GDP more spending over the next 12 years) to provide a meaningful boost to GDP (see this note). Specifically, we expect defence spending to pick up by 0.4%