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Germany’s closely-watched IFO index, which measures business optimism in the country, rose in June despite wider geopolitical uncertainty.
Firms rated the business climate at 88.4, the sixth consecutive monthly rise, and a notch up from the 87.5 reading seen in May.
Business expectations came in at 90.7, up from 89.0 recorded in the previous month, and also marking the highest level seen since early 2023.
The optimism comes despite geopolitical risks that threaten the German economy.
A 90-day pause to so-called “reciprocal” tariffs imposed by the US will come to an end on 9 July, creating significant uncertainty for Europe. The EU could see a baseline tariff of 10% jump to 50% if a deal is not reached before then.
Added to this, President Donald Trump has already reintroduced a 50% duty on EU steel and aluminium entering the US, as well as placing a 25% tariff on imported cars and car parts.
In 2024, Germany posted a record trade surplus with the US of €69.95 billion.
This year, the rising value of the euro may slightly hamper exports as it behaves like an extra tariff, making German goods more expensive for some overseas consumers.
Despite these headwinds, there are factors contributing to the positive business climate in Germany, notably the government’s pledge to increase spending.
Berlin has recently approved a constitutional amendment to its ‘debt brake’ rule, meaning defence spending above 1% of GDP will not be subject to borrowing limits. Chancellor Friedrich Merz wants to boost military spending to 3.5% of gross domestic product by 2029.
The government has also created a €500 billion extrabudgetary fund for additional infrastructure spending, set to give businesses an added boost.
Germany’s economy grew by a greater-than-expected 0.4% in the first quarter of this year, partly linked to US tariff frontloading.
Declining interest rates are also easing borrowing costs for German businesses. At the start of June, the ECB lowered its benchmark interest rate by a quarter point to 2%, its lowest level in more than two years.
Markets widely expect the ECB to hold its benchmark interest rate steady during its next policy meeting on 23-24 July.
