German companies are the most optimistic in over two years

German companies are the most optimistic in over two years, signaling a possible turnaround for the economy after a prolonged period of stagnation.

According to the Ifo Institute, the business expectations index rose to 90.7 in June from a revised 89.0 in May—its highest level since April 2023. The figure also surpassed economists’ median forecast of 89.9, as polled by Bloomberg.

The Ifo index is considered one of Germany’s most reliable early indicators of economic momentum. It covers up to 9,000 companies in manufacturing, services, trade, and construction.

“Expectations brightened in particular,” Ifo President Clemens Fuest said in a statement on Tuesday. “The German economy is slowly building confidence.”

The subindex tracking current conditions also rose, indicating that companies are already starting to feel a lift in their day-to-day business, not just improved prospects further down the road.

The increase is seen as a sign that sentiment among German companies is beginning to solidly tip toward optimism after years of weak growth, shock inflation, and the energy crises that followed Russia’s invasion of Ukraine.

Firms show optimism over the government’s spending plans

Much of the resurgence in business confidence in Germany is attributed to ambitious public investment plans announced by the new government of Chancellor Friedrich Merz.

Delayed because of a snap election in February, the 2025 budget was approved by the cabinet on Tuesday and is now to be presented to parliament for its final adoption. Central to the plan is a pledge to increase military spending to 3.5% of GDP by 2029, directly addressing the rising concerns over security in Europe.

Equally important would be establishing a 500-billion euro ($574 billion) investment fund for infrastructure. This Marshall investment will be a jump-start for Germany. It will modernize the country’s transportation systems, energy infrastructure, and scholarly economy based on extended cycle modernization. 

In addition to those plans, the government offered new tax breaks and investment incentives to help revive its industrial base and make the country more enticing to foreign investors.

The measures represent a decisive shift from years of cautious fiscal conservatism, with hopes that public spending will finally kick-start a more robust recovery.

German firms regain momentum despite global risk

The upbeat note is struck despite serious global headwinds — rising US tariffs, wars in Ukraine and the Middle East, and continued uncertainty in global supply chains.

However, there are signs that Germany is becoming more resilient. On Monday, S&P Global’s flash purchasing managers’ index (PMI) data also showed business activity in the country unexpectedly returned to growth in June from a sharp contraction in May.

The rebound was especially pronounced in the services sector, which was helped by increasing domestic demand and early indications of a pickup in business investment.

German Q1 2025 GDP also surpassed expectations. Economists had initially feared a second consecutive flat reading. Still, the economy expanded slightly, fueled by a jump in private consumption and a surge in business investment, some of it driven by fears that American tariffs on Chinese goods would force companies to front-load their shipments.

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