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Sentiment among German businesses rose in December to its highest level since August, providing some optimism that the current economic downturn could be less severe than feared.

The Ifo business-climate index increased to 88.6 in December from a revised 86.4 in November, marking its third improvement in as many months, according to data from the Ifo Institute released Monday.

Economists polled by The Wall Street Journal expected the index to increase to 87.4. Despite recent improvements, German business confidence remains at a very subdued level by historical standards.

“Sentiment in the German economy has brightened considerably,” Ifo President Clemens Fuest said. “German business is entering the holiday season with a sense of hope,” he said.

The index of the current situation improved to 94.4 in December from 93.2 the prior month, while the gauge assessing companies’ expectations rose to 83.2 from 80.2, the data showed.

The Ifo index is based on a poll of about 9,000 companies in manufacturing, services, trade and construction.

The index improved markedly in the manufacturing, services and trade sectors, while deteriorated slightly in the construction sector, according to the report.

Manufacturers’ expectations improved and good-producers were also more satisfied with their current business. Services providers were more optimistic regarding both current and future business, the Ifo Institute said.

The German economy is expected to contract by 0.4% in the fourth quarter, and by 0.5% in the first quarter of 2023 as high energy prices hit industry and weigh on consumer spending, according to a consensus forecast taken from FactSet. However, recent hard data and sentiment indicators suggest the downturn could be milder than expected as fears of energy rationing this winter fade.

Write to Xavier Fontdegloria at

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