UPDATE 2-German Ifo business sentiment unexpectedly rises but outlook stays weak

German business morale unexpectedly improved in May, a survey showed on Friday, but economists warn that the ‌outlook for Europe's biggest economy remains fragile despite separate data confirming first-quarter growth of 0.3%. The Ifo institute said its business climate index rose to 84.9 compared to a revised 84.5 in April. Analysts polled by Reuters had forecast a decrease to 84.2.

"Following ‌the slump in March and April, business sentiment in Germany has recovered slightly," Ifo President Clemens Fuest said. The Ifo ‌index improved across all sectors, with the exception of construction. Alexander Krueger, chief economist at Hauck Aufhaeuser Lampe, said despite the signs of improvement, "sentiment remains stuck in the basement". "The outlook for both the present and the future remains gloomy." GROWTH OUTLOOK REMAINS WEAK DESPITE IMPROVED SENTIMENT Germany's economy, which has ⁠struggled to ​regain momentum since the COVID-19 ⁠pandemic, grew 0.3% in the first quarter of 2026 compared with the previous quarter, the statistics office said on Friday, defying the impact of ⁠the Iran war. A rise in exports at the start of the year helped drive growth. However, the surge in energy prices ​triggered by the war poses a threat to its long-awaited recovery, some analysts said. "The German economy is ⁠stabilising for the time being, but the situation remains fragile," Fuest said. Joerg Kraemer, chief economist at Commerzbank, said the economy was likely to shrink in ⁠the ​second quarter. Meanwhile, businesses were slightly more satisfied with their current operations, with the index rising to 86.1 from 85.4 in April.

The outlook for the coming months was also less pessimistic, Ifo said, with the corresponding index rising ⁠to 83.8 from 83.5 in the previous month. Carsten Brzeski, global head of macro at ING, sees a complicated combination of ⁠downside risks in the ⁠near-term due to the Middle East conflict and continued optimism on the back of fiscal stimulus further down the line.

"A combination that, at least for now, should shield the German ‌economy against recession, ‌but not against near-stagnation," Brzeski said.

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