German business sentiment rises for the sixth consecutive month, Ifo says

By Maria Martinez

BERLIN, Oct 26 (Reuters) - German business morale improved more than expected in October, extending its recovery to a sixth consecutive month as companies became more optimistic about the outlook, a key survey showed on Monday.

The Ifo Institute said its business climate index rose to 90.2 in October from 89.9 in September. Analysts polled by Reuters had forecast an increase to 90.0.

"The economic recovery is continuing," Ifo's President Clemens Fuest said. 

The index for economic expectations rose to 91.6 in October from 90.4 in September. 

In October, companies were more optimistic about their future business prospects than at any time in more than 4-1/2 years, said Thomas Gitzel, chief economist at VP Bank. 

The German government has raised its forecast for economic growth to 1.3% in 2026 and 1.1% in 2027. It had expected 0.5% growth for 2026 and 0.9% for 2027 in its April forecasts.

"This sixth consecutive (Ifo) rise suggests, first and foremost, that the German economy is on a growth trajectory, despite numerous adverse circumstances," said Hamburg Commercial Bank chief economist Cyrus de la Rubia.

Growth data for the third quarter will be published on Friday. Economists polled by Reuters expect 0.1% growth quarter-on-quarter.

Despite the improvement in the Ifo and some other business surveys in recent months, Capital Economics expects the German economy to have stalled in the third quarter. 

"Nonetheless, along with signs of recovery in the labour market and the ongoing fiscal stimulus, this survey supports our view that the soft patch in the third quarter was partly due to one-off factors and that the economy will return to growth in the fourth quarter," Capital Economics chief Europe economist Andrew Kenningham said. 

The improvement in sentiment is entirely attributable to companies in the manufacturing sector, as the strong order situation and the now-visible effects of the government's infrastructure fund are noticeably boosting business sentiment in the sector, VP Bank's Gitzel said.

 In the services sector, meanwhile, firms have become less optimistic, which is likely due to subdued consumer spending by private households, he said.

 "Today’s Ifo index suggests that for the German economic outlook, all hopes are still pinned on ongoing fiscal stimulus to increasingly feed through to the entire economy," said Carsten Brzeski, global head of macro at ING.

Chancellor Friedrich Merz created a €500 billion ($560 billion)  off-budget infrastructure fund to revitalise the economy and reformed the constitutional debt brake borrowing rules to boost the military.

CURRENT BUSINESS SITUATION WORSENS 

While economic expectations rose and drove the headline increase, the current situation was assessed as being slightly worse, with the index declining to 88.8 from 89.5 in the previous month. 

The sharp rise in oil and gas prices, which has also led to an increase in electricity prices and stock market volatility, will undoubtedly take its toll on businesses, de la Rubia warned. 

"Furthermore, if the economy in France – the second most important export destination for German firms – remains virtually stagnant due to political unrest and turbulence on the bond markets, this will also be felt in Germany," he warned.

Despite all risks, the recovery of the German economy is likely to continue, said Commerzbank economist Joerg Kraemer.

"However, it will probably remain only moderate, owing to the lack of far-reaching reforms, [Donald] Trump’s tariffs, and China’s export offensive," Kraemer said.

($1 = 0.8925 euros)

(Reporting by Linda Pasquini and Maria Martinez, editing by Kirsti Knolle, Ludwig Burger, Toby Chopra and Sharon Singleton)