Germany's business sentiment improved further in July, with the Ifo Business Climate Index rising to 86.6 from 85.7 in June as companies grew more optimistic about the months ahead despite ongoing uncertainty surrounding the conflict in the Persian Gulf. The improvement was driven entirely by stronger expectations, while firms were slightly less satisfied with current business conditions. The latest survey suggests German companies are becoming increasingly confident that activity will recover, even if that improvement has yet to fully materialize.

Manufacturing led the gains, with business confidence rising noticeably as expectations strengthened and demand picked up. Companies also reported easing material shortages, although their assessment of current conditions softened somewhat. The services sector likewise became less pessimistic about the outlook despite a slightly weaker view of present business. Trade confidence improved again, supported by better assessments of both current conditions and future prospects, with retailers becoming less concerned about business performance. Construction also showed further signs of stabilization as both current assessments and expectations improved, while fewer firms reported insufficient order books.

Taken together, the survey points to a broad-based improvement in confidence across Germany's economy, extending the gradual recovery seen in recent months. The contrast between stronger expectations and weaker assessments of current conditions suggests businesses see better conditions ahead but remain cautious about the near-term environment. While the Ifo survey alone is unlikely to materially alter European Central Bank policy expectations, it supports the view that Germany's economy is stabilizing despite persistent geopolitical risks and a still challenging growth backdrop.

Survey Details

Key Takeaways

• German business confidence rose for a third consecutive month, with the Ifo Business Climate Index increasing to 86.6 from 85.7, its highest level since February.
• The recovery was driven by expectations rather than current activity. Expectations jumped to 86.7 from 84.3, while assessments of current business conditions edged down to 86.5 from 87.0.
• Manufacturing showed encouraging signs of improvement, with stronger demand and easing material shortages supporting confidence despite softer assessments of current conditions.
• Confidence improved across all major sectors, including services, trade and construction, suggesting the recovery is becoming more broad-based.
• Companies appeared less concerned about geopolitical risks, with the Ifo Institute noting firms were less pessimistic despite continued uncertainty surrounding the Persian Gulf.
• For markets, the survey supports the narrative of a gradual German economic stabilization, but the divergence between stronger expectations and weaker current conditions suggests the recovery is still in its early stages and is unlikely to materially alter ECB policy expectations on its own.

Full German Ifo release here.

European Central Bank Governing Council member Peter Kazimir from Slovak reinforced the hawkish bias on Monday, arguing that policymakers will likely need to raise interest rates at least once more and warning that a worsening energy shock could ultimately require even more tightening than markets currently anticipate. His remarks come just days after the ECB left policy unchanged while signaling that another move is likely at its September meeting as renewed Middle East tensions push oil and gas prices higher.

Kazimir said he "remain[s] of the view that at least one more hike will be needed as part of our measured adjustment to inflation risks," adding that this would be justified "even if the situation improves somewhat." He also set a high bar for changing that view, saying "very convincing" economic data and geopolitical developments would be needed over the coming weeks for him not to support a September rate increase. More importantly, Kazimir argued the ECB should act before higher energy costs feed through to broader inflation, warning that second-round effects "often form quietly" and that policymakers must "act before that point, not after."

He also opened the door to a more aggressive tightening cycle if the energy shock intensifies. "Should the situation escalate, with the price pressures becoming stronger and more persistent, we will need to tighten more over the next quarters than is currently expected," he said. That aligns with the ECB's recent emphasis on monitoring whether higher energy prices evolve into broader and more persistent inflation pressures rather than treating them as temporary supply shocks. Kazimir added that "we did not surprise the markets in July, and we should not surprise them in September," reinforcing the ECB's preference for preparing markets ahead of major policy moves.

ECB Governing Council member Ante Žigman of Croatia echoed that cautious approach in a separate interview, saying uncertainty "remains high" and that the impact of the latest energy shock "will only be seen in the coming months." He stressed that the "intensity and duration of the shock are crucial" and reiterated that future decisions would depend on incoming data and updated projections while keeping the ECB's medium-term objective of inflation around 2%.

Together, the comments suggest policymakers remain firmly on course for another rate hike while leaving open the possibility of additional tightening should energy-driven inflation prove more persistent than currently expected.

US business activity accelerated at the start of the third quarter, with S&P Global's Flash Composite PMI Output Index rising from 51.9 to 53.6 in July, its highest level in eight months. The improvement was driven by the services sector, where the Business Activity Index climbed from 51.2 to 53.6, also an eight-month high. Manufacturing, however, showed signs of losing momentum. The Manufacturing PMI edged down from 53.9 to 53.8, while the Manufacturing Output Index fell sharply from 56.2 to 53.6, marking a four-month low as earlier inventory-driven strength began to fade.

According to S&P Global Market Intelligence Chief Business Economist Chris Williamson, the survey is consistent with the US economy expanding at an annualized pace of around 2.0% in the third quarter, improving from the roughly 1.2% pace signaled for the second quarter. Businesses also returned to hiring for the first time in three months, pointing to improving labor demand. However, Williamson cautioned that some of July's strength may prove temporary, with spending boosted by the FIFA World Cup and USA 250 anniversary celebrations.

More importantly, the survey highlighted renewed signs of cost pressures emerging beneath the surface. Manufacturers reported intensifying supply chain delays and a renewed increase in input prices as inventory accumulation lost momentum. Williamson warned that the latest escalation in the Middle East is likely to aggravate supply disruptions and inflation pressures further, raising downside risks for growth. The data therefore suggest the US economy entered the third quarter on firmer footing, but the durability of that improvement will depend heavily on whether geopolitical tensions evolve into another sustained energy and supply-chain shock.

Economic Data

Key Takeaways

• US private-sector activity accelerated in July, with the Composite PMI rising to an eight-month high of 53.6.
• Services led the improvement, with business activity also reaching an eight-month high.
• Manufacturing remained in expansion but lost momentum as earlier inventory building began to fade.
• Employment increased for the first time in three months, pointing to firmer labour demand.
• S&P Global estimates the survey is consistent with annualized GDP growth of around 2.0% in Q3, up from roughly 1.2% signaled for Q2.
• Temporary factors, including spending related to the FIFA World Cup and USA 250 celebrations, may have boosted July activity.
• Manufacturers reported worsening supply chain delays and renewed input-cost inflation.
• Escalating Middle East tensions are expected to intensify supply disruptions and price pressures, posing downside risks to growth.

Full US PMI flash release here.