German business morale unexpectedly improved ahead of Brexit

By Michael Nienaber

BERLIN (Reuters) – German business morale unexpectedly improved for the second consecutive month in June, a survey showed on Friday, suggesting company executives in Europe’s largest economy had remained upbeat ahead of Britain’s decision to leave the European Union.

The Munich-based Ifo economic institute said its business climate index, based on a monthly survey of some 7,000 firms, rose to 108.7 in June from a revised reading of 107.8 in May.

The headline figure came in stronger than the Reuters consensus forecast for the index to inch down to 107.5.

The results do not incorporate Britain’s vote to leave the EU as the survey was conducted between June 1 and 23. The majority of replies came in during the first two weeks of the month, an Ifo spokesman said.

“Sentiment in the German economy improved significantly ahead of the Brexit referendum,” Ifo chief Clemens Fuest said, adding managers were a bit more upbeat about the current situation while their expectations improved significantly.

“The German economy remains buoyant,” Fuest added.

Ifo economist Klaus Wohlrabe told Reuters on Friday that he saw no sign of an Ifo index on current conditions changing much in July, adding: “There is no reason at present to change our economic forecasts for 2016.”

The rise in the June Ifo headline figure was driven by improved sentiment in manufacturing, construction and wholesaling while business morale worsened in retailing.

PERIOD OF UNCERTAINTY

Helaba economist Ulrich Wortberg said the Ifo index indicated a good mood among German entrepreneurs.

“But this is likely to change because with the exit of Britain from the EU a long period of uncertainty begins,” Wortberg said. “The next few months will show how strong the negative consequences of a Brexit will actually be.”

The Ifo index followed a chorus of shock and regret from German business leaders over Britain’s decision to leave the EU while Germany’s leading stock index DAX <.GDAXI> temporarily plunged more than 10 percent, the steepest fall since 2008.

“That is a catastrophic result for Britain and also for Europe and Germany, especially the German economy,” Anton Boerner, head of Germany’s foreign trade association, said.

“It is disturbing that the oldest democracy in the world turns its back on us.”

The BDI Federation of Germany Industries said the British vote to leave the EU not only weakened Britain, but also damaged the rest of the bloc and Germany.

The VDMA engineering association said the vote was “an alarm signal” for companies.

“Brexit will hurt investor confidence in Europe as an industrial center. It won’t take long until our machinery exports to Britain will noticeably fall,” VDMA managing director Thilo Brodtmann said.

(Reporting by Michael Nienaber; Editing by Maria Sheahan)