Germany’s business confidence improved more than expected in July, driven by significantly stronger expectations for the months ahead, according to the latest survey from the Ifo Institute.
The institute’s closely watched Business Climate Index climbed to 86.6 in July, up from a slightly revised 85.7 in June, signalling that German businesses are becoming more optimistic despite ongoing geopolitical uncertainties.
Commenting on the findings, Ifo President Clemens Fuest said the German economy was showing signs of greater resilience.
“Despite the uncertain situation in the Persian Gulf, the German economy is showing less pessimism.”
While the Expectations Index rose sharply to 86.7 from 84.3, reflecting growing confidence about future business conditions, companies were slightly less satisfied with their current performance. The Current Assessment Index edged down to 86.5 from 87.0 in June.
The survey also showed that business sentiment improved across all major sectors of the German economy, suggesting a broader-based recovery is beginning to take shape.
Despite the encouraging data, Carsten Brzeski, Global Head of Macro at ING Research, urged caution, arguing that the positive sentiment may not fully reflect the latest geopolitical developments.
“Normally, three consecutive increases in the Ifo index would be a reason to celebrate, pointing to rising business optimism and hopes of an economic rebound in the second half of the year. However, in today’s highly volatile geopolitical environment, even leading indicators can quickly become outdated,” Brzeski said.
According to Brzeski, the latest improvement in the Ifo survey likely captured the initial relief following the US-Iran Memorandum of Understanding (MoU), rather than the more recent spike in energy prices.
He noted that both Germany and the wider European economy have experienced an “emotional rollercoaster” in recent months, as geopolitical tensions and volatile energy markets continue to influence business sentiment.
Just weeks ago, optimism had strengthened after the US-Iran agreement helped push oil prices lower, raising hopes of a long-awaited economic recovery. However, renewed tensions in the Middle East have since reignited concerns over energy costs and economic stability.
Brzeski believes Germany’s short-term economic outlook will largely depend on energy prices and developments in the Middle East.
While the German economy has proven more resilient than many expected, he warned that any escalation of conflict affecting key global trade routes could derail the country’s recovery.
He also highlighted another growing concern: exceptionally warm and dry summer weather has pushed water levels in Germany’s major inland waterways to record lows. This could disrupt industrial supply chains and construction activity, adding further pressure to economic growth.
Looking beyond the immediate challenges, Brzeski said Germany’s longer-term prospects remain supported by planned fiscal stimulus and increased investment in defence and infrastructure.
However, he argued that sustained economic growth will require deeper structural reforms, including measures to improve international competitiveness, secure affordable energy supplies and encourage domestic investment through incentives such as tax cuts.
“These are important elements that are still missing from the government’s recently announced reform package,” he said.
There were further signs of improvement as Germany’s private sector returned to expansion in July for the first time in four months, supported by a sharp rebound in manufacturing.
The S&P Global Flash Composite Purchasing Managers’ Index (PMI) rose to 51.2 in July from 49.5 in June. A reading above 50 indicates economic expansion.
Phil Smith, Economics Associate Director at S&P Global Market Intelligence, said the data pointed to a positive start to the third quarter.
“The German economy made a positive start to the third quarter, with the Composite PMI returning to growth territory after signalling three months of contraction following the outbreak of war in the Middle East.”
Manufacturing led the recovery, recording its strongest production growth in nearly four and a half years.
However, Smith also cautioned that escalating tensions in the Middle East and renewed pressure on global energy prices continue to cloud the outlook.
“The path to a sustainable recovery remains highly uncertain,” he said.
While manufacturing strengthened, Germany’s services sector continued to struggle.
The Services PMI improved to 49.6 from 48.6, reaching a four-month high but remaining below the 50-point threshold that separates expansion from contraction.
New business rose for the first time since February, supported by a modest recovery in services demand and stronger growth in manufacturing orders.
Employment continued to decline, although at its slowest pace since December 2025, while overall business confidence climbed to a five-month high.
Smith also warned that inflationary pressures may be building again.
Input cost inflation accelerated from June’s four-month low, driven mainly by higher costs in the services sector and the expiry of the government’s temporary fuel tax reduction.
“With oil prices rising again, we could be entering a period of renewed inflationary pressures,” Smith said.
While Germany’s latest business surveys point to improving confidence and a return to economic growth, a sustained recovery will depend on geopolitical developments, energy markets and structural reforms, with the momentum of the key factors potentially shaping the country’s economic outlook in the months ahead.