German business morale improved further in July after posting a record increase in June, a survey showed on Monday, suggesting that firms expect Europe’s largest economy to recover from the coronavirus shock if a second wave of infections is avoided.

An important indicator of the German business outlook rose in July for the third month in a row as economic activity continues to pick up after many of the coronoavirus restrictions were eased or lifted.

The Ifo institute said its business climate index rose to 90.5 from an upwardly revised 86.3 in June. This was the third increase in a row and came in better than economists’ expectations for 89.3.

“The German economy is recovering step by step,” Ifo President Clemens Fuest said in a statement, adding that firms were notably more satisfied with the current business situation.

A rise in German business sentiment in July signals that Europe’s biggest economy had a good start to the third quarter and optimism is gradually returning, Ifo economist Klaus Wohlrabe said on Monday.

He said the institute was sticking to its forecast that the German economy will grow by 6.9 per cent in the third quarter.

Ifo’s monthly survey earlier showed that business morale had improved in July, its third increase in a row.

Ifo economist Klaus Wohlrabe said the surprisingly strong Ifo figures suggested that the German economy got off to a good start at the beginning of the third quarter, for which he confirmed a growth forecast of 6.9 per cent.

The German economy is expected to post a double-digit plunge in the three months from April to June, when public life and economic activity came to a near halt due to the pandemic.

The Statistics Office will release preliminary gross domestic product growth data for the second quarter on Thursday.

KfW chief economist Fritzi Koehler-Geib warned it was too early to give the all-clear despite the encouraging Ifo reading and the trend among other sentiment indicators.

“The pre-crisis level will remain a long way off for the foreseeable future, and the continuing fierce rage of the pandemic in large parts of the world is an enormous risk for Germany as an export nation,” she added.  The Ifo institute’s index rose to 90.5 points from 86.3 points in June, the Munich-based organisation said Monday.

“The German economy is recovering step by step,” Ifo head Clemens Fuest said in a statement.

Signs of economic revival have been increasing since the unprecedented shutdowns on business and public life. The Ifo survey is based on interviews with business executives across the German economy, Europe’s largest.

Separately, the purchase managers’ index - a gauge of business activity measured by research firm IHS Markit - rose to 55.5 points in July, above the level of 50 that indicates economic expansion. It was the first 50-plus reading since February.

The recovery still has a long way to go, with much international air traffic shut down and firms generally working below capacity.

Germany’s benchmark 10-year bond yield dipped on Monday in a sign that unease in world markets over rising US/China tensions was driving investors into safe-haven assets.

China took over the premises of the US consulate in the southwestern city of Chengdu on Monday, after ordering the facility to be vacated in retaliation for China’s ouster last week from its consulate in Houston, Texas.

The worsening relations between the world’s two biggest economies boosted safe havens such as gold and government bonds, allowing German debt to recover from price losses on Friday sparked by stronger-than-expected purchasing managers’ (PMI) data.

Germany’s 10-year bond yield was last down about 1.5 basis points at -0.456 per cent, having risen 4 bps on Friday.

“Risk assets are struggling while for Bunds the textbook reaction to the PMIs combined with another failed test of the -0.50 per cent level leaves 10-year yields in the middle of the range,” said Commerzbank rates strategist Michael Leister.

Italian bond yields were a touch lower, with sentiment towards the periphery supported by growing confidence that aggressive fiscal and monetary stimulus in the euro area will help cushion its economy from the coronavirus hit.

Italy’s 10-year bond yield dipped to 1.06 per cent, holding close to a 4-1/2 month low hit last week.  The gap over benchmark 10-year German Bund yields briefly narrowed to around 148 bps, its tightest in five months.

Agencies