By Maria Martinez

BERLIN (Reuters) -German business morale stagnated in May, a survey showed on Monday, falling short of a forecast improvement and suggesting the recovery of Germany’s economy this year will be slow progress.

The Ifo institute said its business climate index remained constant in May at 89.3, compared with a reading of 90.4 forecast by analysts in a Reuters poll.

“The Ifo index, Germany’s most prominent leading indicator, just illustrated that the cyclical bottoming out will not automatically be followed by a strong recovery,” said Carsten Brzeski, global head of macro at ING.

Looking ahead, the economy should gain more momentum, as strong wage growth fuels a cautious recovery in private consumption and even the inventory cycle should gradually start to turn positive, Brzeski said.

“However, this cyclical improvement does not mean everything is suddenly hunky-dory again in Germany,” the economist concluded.

Companies were less satisfied with the current business situation, the Ifo survey showed. Expectations, on the other hand, brightened.

Industry, trade and construction are recovering, while service providers are suffering a setback, the Ifo institute said.

The German economy grew by 0.2% in the first three months of 2024, the statistics office reported on Friday, confirming preliminary data. Gross domestic product shrank in the final quarter of 2023.

In the second quarter, the economy may grow again, Ifo’s head of survey Klaus Wohlrabe told Reuters.

“The upswing remains a fragile little plant,” Wohlrabe said.

The German economy is set to stagnate in the second quarter, according to Commerzbank’s chief economist Joerg Kraemer.

Gross domestic product should start to rise from the middle of the year, he said.

“However, the upward trend is likely to be moderate, partly because the German government is not taking decisive action to counter the erosion of the country’s quality as a business location that has been observed for many years,” Kraemer said.

Although inflation is expected to continue its downward trend this year, Ifo’s Wohlrabe noticed that more companies want to raise their prices in the next three months.

The European Central Bank has all but promised a rate cut for the euro zone on June 6, but policymakers will debate the schedule for subsequent moves depending on progress made in sustainably bringing down inflation.

(Reporting by Rachel More and Maria Martinez; Editing by Toby Chopra)

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