April 24, 2024, 10:27 AM

Germany's Recovery Is "Underway," Says Deutsche Bank

The sentiment indicators for April suggest that the German economy has started Q2 on "decent" tailwinds, said Deutsche Bank.

If this positive dynamic continues, gross domestic product (GDP) could expand more strongly in Q2 than the bank had previously forecast (0.1% q/q). While Deutsche Bank expected to see a nascent recovery from the spring onward, these green shoots are stronger than anticipated, posing upside risks to the bank's 2024 growth forecast (currently a 0.2% y/y contraction).

The bank will review its forecast following the release of the Q1 data next week.

The improvements in the composite PMI and the Ifo business climate for April both surprised against consensus, stated Deutsche Bank. Business expectations Ifo's Wednesday survey improved most noticeably, but the current assessment also improved at the margin. The upside surprise from the preliminary PMI survey was even more convincing, even in the details.

To be sure, the sentiment surveys are still characterized by an unprecedented divergence between an expanding services sector and a contracting manufacturing sector. But even in manufacturing, there are some bright spots in the forward-looking components, both in the sector-specific PMI (Aprile future output: 53.3) and in the Ifo (manufacturing business expectations: 93.6). The bank is optimistic that robust global growth will finally translate into somewhat stronger export growth in the coming months.

The positive surprises in the services sector suggest that the recovery in domestic demand is driven primarily by consumption. This revival in consumption isn't yet obvious from the hard data, with retail sales starting the year on the back foot, added Deutsche Bank. Yet, the return to positive real income growth in a strong labor market is likely to lead to a noticeable improvement in private consumption.

Consumer sentiment has already stabilized in surveys and the bank expected it to improve further in the coming months. A growth recovery based on consumption may not be a recipe for dealing with structural headwinds. But for now, it is enough to wake the German economy from its "hibernation," according to Deutsche Bank.

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