Confidence among German businesses improved in March, driven by a strong rebound in the manufacturing sector and optimism surrounding major government spending plans. The ifo Business Climate Index climbed to 86.7 in March, its highest level in seven months, from 85.3 in February, signaling renewed economic momentum.

The improvement was reflected in both current assessments and future expectations. The ifo Expectations Index, a key measure of sentiment, rose to 87.7, reaching an eight-month high. The ifo Current Condition gauge also increased to 87.7 from 85.6 in February, in line with market forecasts.

“Sentiment among companies in Germany has brightened,” said Clemens Fuest, president of the ifo Institute. “Companies were more satisfied with their current business situation, and their expectations rose noticeably. German businesses are hoping for a recovery.”

Manufacturing Drives Growth

The manufacturing sector saw a significant boost in confidence, with firms showing greater optimism about future prospects. While order books showed a slight decline, companies viewed their current situation more favorably. The service sector also experienced a rise in confidence, particularly among architectural and engineering firms, which reported a clearer sense of optimism.

In the trade sector, sentiment strengthened as traders became less pessimistic about the future and assessed their current business conditions more positively. The construction sector showed a modest improvement in mood, with firms slightly more optimistic about conditions. However, a persistent shortage of orders continues to challenge the industry.

On Monday, S&P Global’s flash Purchasing Managers’ Index (PMI) provided further signs of recovery. The Germany Composite PMI Output Index increased to 50.9 in March from 50.4 in February, marking its highest level since May 2024. The improvement was led by a sharp expansion in manufacturing output, which rose at its strongest rate in three years, with the output sub-index reaching 52.1.

New manufacturing orders increased for the first time in two years, supported by stronger domestic demand and inventory rebuilding efforts. “Manufacturers have ramped up production for the first time in nearly two years,” said Dr. Cyrus de la Rubia, Chief Economist at Hamburg Commercial Bank. He attributed the improvement to Germany’s recently approved €500 billion infrastructure and defense investment plan, which has helped restore business confidence.

Challenges in the Services Sector

Despite gains in manufacturing, the services sector struggled, with the services PMI slipping to 50.2, indicating near-stagnant activity. New business declined sharply, and service providers faced difficulties in passing on higher costs through price increases. Nonetheless, sentiment remained positive across both sectors, with firms expressing optimism about future output.

Market Reactions and Global Trade Developments

Financial markets responded positively to the improving sentiment. The DAX index rose 0.8% in morning trading on Tuesday, supported by global optimism following U.S. President Donald Trump’s softened stance on upcoming tariffs. At a White House briefing, Trump hinted that “a lot of countries” might receive exemptions and that not all tariffs would take effect as planned on April 2.

Bayer AG shares led gains on the DAX, rising 4%, followed by BMW AG (+1.6%) and Deutsche Börse (+1.5%). Meanwhile, Sartorius AG and Siemens AG underperformed, falling 2.4% and 1.7%, respectively.

Across European markets, the Euro STOXX 50 climbed 0.4%, Italy’s FTSE MIB rose 0.8%, and Spain’s IBEX 35 gained 0.9%. The Euro STOXX Bank Index added 0.5%, driven by a 2.3% rise in Crédit Agricole and a 1.8% increase in ABN Amro.

German software giant SAP SE has officially overtaken Danish pharmaceutical company Novo Nordisk to become Europe’s largest publicly traded company by market capitalization. The shift comes amid contrasting stock performances, with SAP seeing significant gains while Novo Nordisk experiences a prolonged decline.

SAP, headquartered in Walldorf, Baden-Württemberg, has witnessed a 40% surge in its share price over the past year. The company’s stock rose more than 1% during morning trading in Frankfurt, bringing its market capitalization to approximately €312 billion. This upward trend reflects strong investor confidence in SAP’s strategic pivot towards subscription-based cloud services, enhanced by artificial intelligence capabilities.

Meanwhile, Novo Nordisk, known for its blockbuster weight-loss drug Wegovy, has seen its market value steadily decline. The Danish firm’s shares in Copenhagen dropped more than 2%, lowering its market capitalization to roughly €309 billion. Since last summer, Novo Nordisk’s stock has nearly halved in value, despite reporting a 25% increase in its 2024 revenue.

The pharmaceutical company’s downturn was exacerbated by disappointing study results for its next-generation weight-loss drug, CagriSema. Investors had high expectations for the drug’s effectiveness, but recent trial data indicated no significant advantage over existing treatments, causing further uncertainty and dragging down the company’s share price by approximately 16% in 2024 alone.

In contrast, SAP’s positive momentum has been fueled by its strategic shift toward cloud-based services and AI integration, which investors view as key drivers of future revenue growth. The company’s strong performance has led investment bank JPMorgan to reiterate an “Overweight” rating on SAP shares, with a price target of €300. Analysts at JPMorgan described the current stock levels as an “attractive buying opportunity.”

The shift in market leadership underscores the volatility in the pharmaceutical sector and the growing dominance of technology-driven business models. While Novo Nordisk continues to face challenges in sustaining investor confidence, SAP’s forward-looking approach positions it as a leader in Europe’s corporate landscape.

Uncertainty surrounding global trade policies is expected to have a significant impact on business investment in major economies, with the EU and UK projected to see a 2% decline in investments this year, according to a report by Oxford Economics.

Investment Decline Amid Trade War Fears

The study warns that businesses are scaling back investment plans due to increasing trade tensions, particularly those influenced by the policies of former U.S. President Donald Trump. With global trade disputes escalating, investment across key economies such as the U.S., China, the Eurozone, and the UK is facing a notable decline.

Oxford Economics found that investment undershot by approximately 4% in the U.S. and China and around 2% in the Eurozone and UK. While this decline is not catastrophic, it poses a significant challenge to global economic stability. In 2023, business investment accounted for 22% of GDP in China, 15% in the U.S., 12% in the Eurozone, and 10% in the UK. The decline in investment could have a lasting effect on economic growth.

Impact of Tariffs and Trade Policies

Beyond the uncertainty itself, higher tariffs imposed as part of ongoing trade disputes are also negatively affecting economic growth while simultaneously driving inflation higher.

The report highlights growing trade tensions between the U.S. and the EU, particularly after Trump proposed a 200% tariff on EU alcohol imports in retaliation for the EU’s 50% duty on U.S.-made whiskey. In response, the European Commission is considering countermeasures on up to €26 billion worth of U.S. goods.

Additionally, the U.S. government is closely monitoring the EU’s digital competition regulations, which could result in substantial fines for major American tech companies such as Apple and Meta. Retaliatory measures from the U.S. remain a possibility.

Small Economies at Higher Risk

Oxford Economics’ research indicates that smaller, trade-dependent economies in the Eurozone—such as Luxembourg, Slovakia, and Bulgaria—are likely to be hit the hardest. GDP in these countries could shrink by up to 1% over the next two years due to reduced investment and trade activity.

Among larger EU economies, Belgium and Italy are expected to suffer the most. Exporters that rely on U.S. markets are particularly vulnerable, as firms hesitate to expand capacity or invest in production amid the uncertainty of shifting trade policies.

This uncertainty is also affecting the automotive industry, a key sector for EU exports. The unpredictability of U.S. tariff policies has led to hesitation in investment decisions related to hiring, research and development, and market expansion. Consumers, too, are delaying major purchases, further slowing economic activity.

Possible Outcomes for Global Trade

Oxford Economics outlines four possible scenarios for trade uncertainty and its impact on private investment and global growth.

1. Rapid Decline in Uncertainty – If trade policy uncertainty dissipates by the end of the year, investment levels are expected to recover in 2026 and beyond.
2. Prolonged Uncertainty Until 2028 – If uncertainty persists and is coupled with increased tariffs, global investment could suffer long-term harm, with declines of up to 10% in the U.S. and China, 6% in the Eurozone, and 4%-5% in the UK.
3. Gradual Decline to a High-Level of Uncertainty – If uncertainty remains elevated for several years, it could lead to a sustained drag on global investment, reducing it by 10%-20% in major economies.
4. Uncertainty Lasting Until 2029 – The worst-case scenario predicts a 20% drop in investment in China, 14% in the U.S., 10% in the Eurozone, and 7% in the UK by 2029.

The report suggests that, in such a scenario, governments would need to introduce major monetary and fiscal policy interventions to prevent prolonged global economic stagnation.

A Growing Concern for Global Markets

As trade tensions persist and global uncertainty mounts, businesses are bracing for a challenging investment climate. Without a resolution to trade disputes, economic growth could face prolonged difficulties, reinforcing a cycle of low confidence and declining investments.

The coming months will be critical in determining whether global policymakers can ease tensions and provide stability, or if prolonged uncertainty will further hinder economic recovery.