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 However, in today’s highly volatile geopolitical environment, even leading indicators can quickly become outdated,” Brzeski said.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.

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In manufacturing the index rose significantly. Assessments of the current business situation improved, reaching their highest level since July 2011. Business expectations are also far more optimistic than last month. Capital goods manufacturers in particular reported very good ongoing business and their order books are filling up. Many manufacturers are planning to ramp up production and prices are expected to rise.

In wholesaling the business climate improved thanks to far more optimistic business expectations. Assessments of the current business situation, by contrast, edged down from last month’s record level.

In retailing the index declined, but remained high. Retailers made slight downward adjustments to both their assessments of the current business situation and their business expectations.

In construction the index rose. Assessments of the current business situation improved again to reach their highest level since 1991. Expectations remain almost unwaveringly optimistic and construction activity picked up markedly.

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Berlin, February 25: German business confidence rose for the fourth successive month in February to reach its highest point since July 2011, bucking forecast by an economists’ poll that predicted otherwise and indicating that the German economy was holding its own, data released by a research group on Monday showed.

The Ifo Institute Business Climate Index, based on a survey of 7,000 firms from the country’s manufacturing, construction, wholesaling and retail sectors, crept up to 111.3 in February from 110.6 the previous month, despite a drop in expectations.

In the same vein, the index for business conditions rose to 114.4 in the month under review from 112.4 in January, said the research organisation, part of the CESifo research group consisting of the Center for Economic Studies (CES) and the CESifo GmbH (Munich Society for the Promotion of Economic Research) apart from Ifo Institute.

“Assessments of the current business situation were significantly better than last month,” said Ifo Institute President Hans-Werner Sinn in a statement. “Expectations regarding future business developments dipped slightly, but remain optimistic. The German economy is holding its own in a changeable global climate.”

However, economists had predicted a decline to 110.5, according to the median of 41 estimates in a Bloomberg News survey.

At the same time on the other hand, Ifo Institute’s data was in line with the flash estimate findings released last week by economic health tracker Markit, that said the economy of the euro area in general – and that of Germany in particular – continued to expand in February, enjoying its strongest run of growth since the first half of 2011.

“The economic upturn in Germany’s private sector gathered further momentum in February, with business activity rising at the quickest pace in 32 months,” said Oliver Kolodseike, economist at Markit and author of a flash estimate for Germany.

Brighter Outlook

The Ifo Institute seems to bolster this view. According to it, assessments of the February current business situation were significantly better than last month despite expectations of future business developments dipping slightly. “The German economy is holding its own in a changeable global climate,” it said in its report.

Similarly, Sylvain Broyer, chief euro-region economist at Natixis in Frankfurt, said he expected growth acceleration this year in Germany. “It’ll be led by a private consumption like last year,” Bloomberg quoted Broyer as saying. “This year, what should be new is business investment.”

Regarding the business climate, Ifo said it improved for the fourth month in succession in manufacturing.

“Manufacturers are far more satisfied with the current business situation,” it said. “Their confidence in future business developments weakened slightly, but remained high. Although the export outlook clouded over, the majority of manufacturers remain optimistic.”

In retailing too, the business climate index rose significantly, according to the research group, noting that assessments had reached their highest level since spring 2012. Expectations regarding future business developments also continued to brighten.

In sectors such as wholesaling, construction and service sector, however, it was a different story.

The business climate index decreased slightly after last month’s sharp increase in wholesaling. “Wholesalers were once again clearly more satisfied with their current business situation. However, they are no longer quite as positive about future developments,” its report said.

Similarly, assessments of the current business situation are less favourable and the index fell slightly though remaining at a high level. “Last month’s optimism regarding the next six months also faded somewhat,” Ifo said.

The indicator for the German service sector also fell in February. Service providers were “somewhat” less favourably inclined than in January, and “there was a clear downturn in expectations”.

Happy Estimate

In its flash estimates for Germany released on February 20, Markit said the country’s private sector firms reported a further solid rise in activity in February.

It said its seasonally adjusted flash composite output index had posted a 32-month high of 56.1 in the month under review, up from January’s reading of 55.5, stretching the current sequence of activity growth to 10 months.

Manufacturing companies signalled an easing in the pace of production growth in February, although the latest expansion was still among the steepest seen since early 2011. Increased order intake was the primary driver for the latest rise in output, according to Markit’s panel members.

However, the Markit estimates had differed from Ifo’s in the service sector; according to it, service providers reported the “sharpest rise in activity since November”, with new orders being placed at the quickest pace in three months.

Anecdotal evidence suggested that rising inflows of new work were linked to increased demand from both domestic and foreign markets and unusually mild weather. Concurrently, manufacturers saw new export orders rising at the second-sharpest rate in almost three years, with the US, Asia, the Middle East, Poland and Russia mentioned as sources of growth.

Capacity pressures continued to build during February, with backlogs of work rising for a fifth month running. The rate of backlog accumulation eased, however, to the weakest since last October.

In line with the trends for output and new orders, German manufacturing companies also reported higher purchasing activity in February. The latest expansion was robust and among the sharpest in the past three years.

“Survey data for 2014 dovetails nicely with the expectations of government statisticians, who recently raised their growth forecast for the German economy to 1.8 per cent,” said Markit economist Kolodseike.

“The recovery in the euro zone’s largest economy is looking more and more sustainable, underpinned by the strongest rate of job creation in just over two years.”

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