Statistics released in recent days show that the German economy has been improving in a number of indicators, indicating that the German economy may be recovering from the bottom of the economic recovery momentum continues. But the data are still mixed and optimism about the outlook for the recovery needs to be guarded against.

A number of indicators continued to improve

The Index of German business sentiment published on July 27th by IFO, a think-tank, rose for the third month in a row to 90.5, but was still down from 96 in February. The business climate index, based on a survey of the heads of some 9,000 German companies, is an important barometer of the country's economic fortunes. The coVID-19 index, which fell to 74.2 in April, rose above 90 for the first time in July, marking three consecutive months of gains.

Manufacturing capacity utilization rose to 74.9% in the month from 70.4%, and companies also expect business to grow again in the coming months. In services, business sentiment also rose strongly and is now in positive territory.

A separate survey on the same day showed German business confidence improving further in July, following a record rise in June.

German consumer confidence index rose for the third month in a row in August to minus 0.3 points, up 9.1 points from the revised final reading in July, GFK said on Tuesday. Economists say the VAT cut has a positive effect on the rebound in consumer confidence. The German government announced in early June that it would cut the VAT rate during the period from 1 July to 31 December this year.

Foreign trade has also shown signs of improvement. German export expectations turned negative in July, rising to 6.9% from -2.2% in June, according to iFO's economic Research Institute on Thursday, continuing a strong rebound from the previous two months. The index fell to a record low of -50.2 per cent in April as a result of the COVID-19 outbreak, before Posting its biggest month-on-month rise in June.

As for the signals sent by the data, Clemens Fiest, director of iFO's Institute for Economic Research, said in a statement that German companies were "cautiously optimistic" about the coming months, while showing a marked increase in their satisfaction with their current operations. He said the German economy was gradually recovering. The gradual improvement of the epidemic prevention and control situation in many countries around the world has had a positive impact on Germany's export economy. Among them, the German car export industry, which has been hard hit by the epidemic, is particularly strong. The electronics and pharmaceutical sectors are also expected to see significant increases in exports in the coming months. Although export expectations have not improved further, the pessimism in the machinery industry has diminished significantly. Exports of clothing and leather goods, however, are expected to be more difficult to recover in the short term.

The outlook for recovery remains cautious

Earlier this month, the European Commission released its latest forecast that the 19-country euro zone's economy would contract by 8.7 percent this year and that the entire European Union would contract by 8.3 percent. Germany has recovered better from the crisis than Italy, Spain and France. According to the report, Germany's economy will contract "only" 6.3 per cent this year, France's 10.6 per cent, Spain's 10.9 per cent and Italy's 11.2 per cent.

IFO economist Peter Wallaber said the unexpectedly strong data showed the German economy had made a good start to the third quarter. He reiterated his forecast that the economy would grow 6.9 percent in the third quarter.

The German central bank also said in its monthly report on The 27th that the German economy is rebounding and is likely to continue to rebound in the second half of the year, supported by the fiscal stimulus adopted by the government in response to the COVID-19 outbreak. The Bundesbank also believes that Germany's excessive current account earnings will be dragged down by the global trading slowdown as a result of the outbreak. The Bundesbank estimates that Germany's current account earnings will be less than 5 per cent of gross domestic product a year by 2022, down from more than 7 per cent in 2019. Because of the coVID-19 outbreak, German economic output is likely to fall significantly in the second quarter than in the first.

A number of German economists have warned that Germany's economic recovery still faces many risks and challenges. Moreover, Germany's dependence on exports means that the pace of its rebound also depends on improved demand from its main trading partners.

Friederike Koler-Geb, chief economist at KFW, notes that the German economy is still a long way from pre-COVID-19 levels for the foreseeable future; At the same time, the epidemic remains severe in many parts of the world, posing great risks to Germany, which specializes in exports.

The German economy is expected to show a double-digit decline between April and June when the federal Statistics office releases its first estimate of second-quarter gross domestic product this week.

Germany's federal Labour Office said on July 22 that the country's Labour market could take two to three years to return to normal as a result of the COVID-19 outbreak. Germany's labor market will not return to normal until 2022 or 2023, federal Labor Commissioner Detlev Scheele told German media. He also warned that the Labour market remained under "pressure" from the outbreak, despite the stabilising effect of the surge in short-time working and no signs of mass lay-offs.

The Bundesbank also noted mixed economic indicators, with manufacturers reporting that business conditions in June "remained poor". The Bundesbank's weekly activity index "has risen markedly in recent weeks, but remained clearly negative in mid-July".

Michael Holstein, an economist at DZ Bank, said German companies were still a long way from returning to business as usual and that optimism should be tempered by caution given factors such as the risk of a second wave in the coming months.

The resurgence of the epidemic is the biggest concern

Recently, a second wave of novel Coronavirus infection has appeared in Europe, bringing concerns for economic recovery.

The state of Bavaria, southern Germany, reported on 26 July that 174 seasonal labourers ona farm had been confirmed infected with novel Coronavirus. The governor of Saxony, MichaelKretschmer, warned that the recent rise in infection rates and cluster outbreaks in Germany showed that "a second wave has arrived".

With the relaxation of travel restrictions in Europe and the increase in summer travel, Spain, France and other places have seen a rebound in the epidemic.

Ryanair, Europe's largest budget airline, said it had reported a loss of 185 million euros in the second quarter and that even if flights were to resume gradually, a second coVID-19 outbreak could hit its operations. "We cannot predict how long the outbreak will last, and the second coVID-19 outbreak across Europe is our biggest concern right now."

Economists predict that even countries that did well in the first round, such as Germany, will be hit hard by the second wave, although another large-scale lockdown is unlikely.

HubertusBardt, director of the German Institute for Economic Research, and StefanKooths, director of the Kiel Institute for World Economics' Economic Forecasting Centre, said it was unlikely that there would be a second national lockdown because of the economic impact of the massive march/April blockades.

Bardt says companies have learned how to deal with the virus threat, and expect a second wave to hit production capacity but keep production lines running. Still, companies will face the challenge of fewer orders and more bankruptcies. For Germany, which depends on imports and exports, business orders will fall again. German exports fell by almost a quarter in April, after falling by 12 per cent in March during the previous wave.

Kooths is also concerned that temporary changes to Germany's bankruptcy laws have saved at least 30,000 companies from going bankrupt, but the measure has only prolonged the restructuring time of the more stressed companies, many of which have taken out loans for day-to-day expenses rather than production, and that the company's fundamentals have not improved.

More importantly, the amount of money spent on fiscal expenditure is not unlimited. The "ammunition" to stimulate the economy may be exhausted in the first wave. If the second wave occurs, countries may face a more severe economic situation.