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Speaker 1: Germany's business outlook improved for a third month in November,

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Speaker 1: pointing to and in pending recovery, perhaps for an economy

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Speaker 1: that is probably in recession now and beset by a

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Speaker 1: budget crisis. The EFO Institute's gauge of expectations rose to

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Speaker 1: a six month high of eighty five point two. It

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Speaker 1: was less than economists that expected, less than the Bloomberg survey,

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Speaker 1: but still a tick upwards. Joining us now is the

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Speaker 1: EFO President Clemens First, welcome back to the program. Thank

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Speaker 1: you so much for joining us again. Is the worst

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Speaker 1: of Germany's economic downturn now definitely behind us? Do you think.

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Speaker 2: Maybe it's earty to say it's definitely behind us, But

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Speaker 2: it's certainly a stabilization. It's a stabilization at a low level,

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Speaker 2: but a stabilization we expected. I would say it's driven

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Speaker 2: by interest rates probably having peaked. It's driven by energy

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Speaker 2: prices easing. We see that in manufacturing, for instance, in

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Speaker 2: particular Kular, the energy intensive companies that were so affected

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Speaker 2: by energy prices, they are now telling us things are improving.

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Speaker 2: So it seems that the hope for an easing of

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Speaker 2: energy prices and generally an easing of inflation and the

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Speaker 2: lower interest rates are driving this stabilization.

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Speaker 3: Okay, that's interesting. So energy prices and interest rates, and

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Speaker 3: you're seeing that improvement already in terms of energy prices.

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Speaker 3: What is the expectation then around interest rate cuts? Because

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Speaker 3: ECB officials continue to stick to the mantra of higher

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Speaker 3: for longer. Interest rates are at four percent across the Eurozone,

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Speaker 3: inflation is at two point nine percent. Has the ECB

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Speaker 3: gone too far? What are you hearing from businesses?

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Speaker 2: I wouldn't say they've gone too far, but in markets

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Speaker 2: we just see the expectation that interest rates will be

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Speaker 2: falling next year. And I think it's understandable that the

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Speaker 2: central bank signals it's ready to increase rates further necessary,

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Speaker 2: but markets seem to think it won't be necessary. The

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Speaker 2: economy is slow. Yes, there is some recovery, but there

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Speaker 2: is no big boom. Energy prices are coming down, and

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Speaker 2: that suggests inflation will also be easing further, and that

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Speaker 2: would create room maybe in the second half of twenty

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Speaker 2: four for interest rate cuts. Of course for the central

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Speaker 2: bankets early to talk about that, but that's what markets expect.

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Speaker 1: Yeah, absolutely. Vilo was saying the ECB won't raise rates again.

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Speaker 1: The issue though, is whether there is a risk of

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Speaker 1: inflation surging once more. That's the kind of trepidation that

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Speaker 1: the ECB has.

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Speaker 2: Yes, and I think for them it's important to stabilize expectations.

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Speaker 2: And indeed there are risks, for instance, if there was

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Speaker 2: a change in the situation on energy markets, or if

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Speaker 2: we take into account that wages are rising more quickly

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Speaker 2: now that may affect prices in particular in the service industry.

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Speaker 2: So there is certainly, you know, there is no certainty

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Speaker 2: that inflation will come down, and the central Bank tries

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Speaker 2: to maintain expectations stable by saying, if necessary, we will

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Speaker 2: increase interest rates further. Nevertheless, the main scenario and what

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Speaker 2: we see implicit in futures prices in financial markets is yes,

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Speaker 2: interest rates have peaked, inflation will come down, and I

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Speaker 2: think that's what's, you know, part of the story why

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Speaker 2: the German economy seems to be stabilizing.

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Speaker 3: We're very used, Clement's good morning. We're very We're very

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Speaker 3: used to budget kales here in the UK, thanks to

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Speaker 3: our former Prime Minister Liz Trust you are facing budget

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Speaker 3: kales now in Germany. The debt gap is being lifted

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Speaker 3: for the full time this year. Mister Lindner must be

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Speaker 3: gritting his teeth over that one. What is the potential

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Speaker 3: economic impact as the German coalition wrestles with this budget

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Speaker 3: and the changes that have to come through as a

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Speaker 3: result of this, this ruling that seems to take so

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Speaker 3: many by surprise.

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Speaker 2: Certainly this creates more uncertainty and about future subsidies and

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Speaker 2: policies around the energy transition, around infrastructure investments, and a

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Speaker 2: lot of businesses will now wait and see what the

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Speaker 2: government does. The real challenge is the twenty twenty four budget.

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Speaker 2: There is something like a thirty five billion hole at

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Speaker 2: the moment, and how can that be felled? That's what

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Speaker 2: the government is struggling with. It will be very hard

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Speaker 2: to declare another emergency next year, so the government will

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Speaker 2: have to be creative there. There are some options like

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Speaker 2: using public companies to incurd that. Maybe some of the

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Speaker 2: subsidies can be postponed. Some of them are maybe unnecessary,

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Speaker 2: So there's debate about the ten billion subsidy for the

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Speaker 2: intel plant in Marketbog for instance. But I mean this

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Speaker 2: whole thing certainly has a dampening effect on an economy

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Speaker 2: which is already relatively weak.

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Speaker 1: Yes. Absolutely, We were looking at the PMI figures for

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Speaker 1: November and yesterday manufacturing and services figures improving on the mend,

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Speaker 1: but they still do highlight the difficulties. Do you see

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Speaker 1: a continuing improving trend though for the pmis perhaps what's

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Speaker 1: the next data point that you'll be watching.

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Speaker 2: We do expect this recovery to continue, but an important

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Speaker 2: factor will be how these budget negotiations are continuing. I

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Speaker 2: mean there are options. For instance, the government could sit

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Speaker 2: down with the opposition and suggest a solution similar to

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Speaker 2: the Armed Forces Special Fund that was created. It was

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Speaker 2: enshrined in the constitution. A bit unusual maybe, but a

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Speaker 2: solid way of doing this, a solid legal basis, And

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Speaker 2: the government could do that with the investments in infrastructure

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Speaker 2: and energy transition, and I think that would give a

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Speaker 2: boost to private investment in this area. Also, the big

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Speaker 2: question is will there be is it realistic politically to

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Speaker 2: get to such an agreement. It's certainly early days to

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Speaker 2: say that. If that doesn't work, I think the budget

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Speaker 2: situation will negatively affect growth next year.

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Speaker 3: Okay, ifire President clements first, always appreciate your time and

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Speaker 3: your insights on this German economy, thank you very much. Indeed,