Companies can restructure strategies for improved decision-making.
In a recent survey conducted by the ifo Institute, economic uncertainty in Germany has shown signs of gradual improvement for several industries, though challenges remain, particularly in manufacturing and energy-dependent sectors.
The survey, which measures business uncertainty as part of its monthly business survey, revealed that in June 2023, 20.2% of German businesses found it difficult to predict their business prospects, down from 23.3% in May and 28.3% in April. This decrease suggests a more optimistic outlook for businesses across the country.
However, the escalation between Israel and Iran has resulted in a trend towards increasing uncertainty, particularly in the industry sector. In this specific survey, there is an increase in uncertainty, particularly in the industry sector, following the escalation. Around 20% of responses in the June 2023 ifo Institute survey were received after the escalation between Israel and Iran on June 13.
The manufacturing sector experienced significant volatility. In early 2023, contraction was evident, but by June 2023, the Purchasing Managers' Index (PMI) rose to 49.0—the highest since early 2023—indicating a narrowing contraction and signs of stabilization. This improvement was driven by stronger domestic demand, a pickup in new orders, especially in intermediate goods, and eased supply chain bottlenecks.
In retail, 27% of companies were uncertain about their future business in June. Despite this, supported by bottoming out of economic declines and real income gains, consumer-related industries showed signs of recovery. Retail sales increased slightly in early 2023 and were nearly 3% higher than a year before, signaling improving consumer confidence despite ongoing structural challenges.
The construction industry can plan upcoming projects better, with only 19.3% of companies finding it difficult in June, a decrease of 10 percentage points from the start of the year. A likely driver for the improvement in the construction industry's ability to plan projects is the federal government's more concrete infrastructure package.
In the chemical industry, the proportion of companies reporting difficulties in planning their business development increased to 41.4% in June. Among service providers, uncertainty has been lower in previous months and fell to 15.2% in June.
Contributing factors to changes in uncertainty include the energy crisis and monetary policy, supply chain dynamics, geopolitical tensions, structural challenges and competitiveness, inflation, and consumer income. The large industrial sector, including manufacturing, was exposed heavily to the energy crisis and tightening monetary policies, which heightened uncertainty earlier in the period. Improvements in energy supply and cost dynamics by mid-2023 helped ease some of these pressures.
The gradual easing of supply chain disruptions, including shorter supplier delivery times and lower freight costs, contributed to improving business confidence and reduced inflationary pressures in production. Ongoing geopolitical uncertainties maintained a cautious environment, particularly affecting exports and global demand. The sluggish export sales reflect these external risks.
Despite some recovery signs, Germany's weak competitiveness and structural challenges have constrained a sustained upturn in several industries, adding to economic uncertainty. Inflation rates stabilized around 2.6% in early 2023, similar to the previous year, helping to support real income gains and consumption recovery, which positively influenced consumer-related sectors.
In conclusion, between April 2023 and June 2023, economic uncertainty in Germany decreased moderately in manufacturing and consumer sectors thanks to improved demand conditions, easing supply chain and inflation pressures, and recovering industrial activity. However, structural weaknesses, energy market challenges, and global demand uncertainties continued to restrain a robust and broad-based recovery across industries.
In the retail sector, 27% of companies expressed uncertainty about their future business prospects in June, yet consumer-related industries began showing signs of recovery due to bottoming out of economic declines and real income gains.
The finance industry could potentially be affected as uncertainty in the industry sector has increased following the escalation between Israel and Iran, impacting around 20% of responses in the ifo Institute survey received after the escalation.
