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German Ifo Business Confidence Unexpectedly Strengthens

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Germany's business sentiment improved unexpectedly in May as companies were much more satisfied with their current business, while they remained cautious regarding the outlook, survey results from the ifo Institute showed on Monday.

The business confidence index rose to 93.0 in May from 91.9 in April, the Munich-based ifo said. The index was forecast to fall to 91.4 after a modest improvement in the previous month.

In May, companies were more satisfied with their current business conditions, while their future expectations were rather unchanged as companies remained skeptical in the backdrop of rising inflationary pressures and the war in Ukraine.

"The German economy has proven itself resilient in the face of inflation concerns, material bottlenecks, and the war in Ukraine," ifo Institute President Clemens Fuest said.

"There are currently no observable signs of a recession."

The current conditions indicator rose to 99.5 in May from 97.3 in April. The index measuring business expectations increased marginally from 86.8 to 86.9.

Economists were wary regarding reading too much into the improvement in the ifo index.

"The German economy will definitely not plunge as it did during the 2020 lockdowns," ING economist Carsten Brzeski said.

"However, with the pending risk of stagflation and the longer-term impact of the war in Ukraine, and structural changes in the economy, we warn against too much optimism."

Germany's private sector growth slowed in April due to the weakness in manufacturing, the latest purchasing managers' survey by S&P Global showed earlier this month.

In manufacturing, both new orders and output slipped into contraction territory for the first time since June 2020, the purchasing managers' survey showed.

Among sectors, the ifo business climate index for the manufacturing sector improved notably in May as companies assessed their current situation as somewhat better, and expectations strengthened strongly.

Nevertheless, they were still cautious regarding the outlook amid a significant slowdown in demand and a fall in new orders.

Similarly, the ifo business climate indicator for the service sector rose from the previous month, marking the biggest improvement since June 2021.

Service providers were more satisfied with their current business situation, while they were more pessimistic towards outlook, especially firms in transport and logistics sectors.

The ifo index for trade increased for the first time in three months in May, while expectations remained clearly downbeat.

Business morale recovered somewhat in construction from its slump in April, driven by an improvement in the current situation assessment. That said, most firms were pessimistic regarding the outlook.

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