News Analysis: Concern over German economy remains despite improving economic morale

Key indicators measuring German economic morale improved in March, surveys found on Tuesday. Experts, however, warned that Europe's biggest economy faced a cloudy future as slow global growth curbed exports and investment.

Confidence of both German investors and companies about the economic outlook improved in March. Center for European Economic Research (ZEW)'s index of investors' morale increased slightly to 4.3 points from 3.3 points. Munich-based Ifo economic think tank also reported a "slightly brightened" sentiment of companies, the first time in the past four months. The corresponding Ifo index rose to 106.7 points from 105.7 points.

"German businesses seem to have shaken off fears of long-lasting global slowdown," said Carsten Brzeski, chief economist at ING-DiBa bank, calling the Ifo index "a reason for moderate optimism."

However, the optimism was not shared by all analysts. On Monday, experts at the German central bank said the economy would slow down in the second quarter, referring to stagnating factory orders at the start of the year.

"The uncertainty associated with the future economic development of important emerging economies, with the development of the oil price and with the external value of the euro continues to call for caution," said Sascha Steffen, an expert at ZEW.

Earlier on Tuesday, London-based Markit institute reported that Germany's manufacturing Purchasing Managers' Index (PMI) declined to 50.4 points in March, meaning the country's manufacturing sector grew at the slowest pace in 16 months.

"It looks as if momentum in the German economy will remain sluggish in the months ahead," said Markit economist Oliver Kolodseike.

The German economy has shifted its growth engine from exports to domestic demand. In 2015, the economy grew by 1.7 percent. Private consumption fueled by a stable labor market and government spending on some 1.1 million asylum-seekers was the main contribution.

Recent figures on factory orders, however, showed both domestic and foreign demand had weakened. In January, domestic orders decreased by 1.6 percent, while new orders from outside the euro zone dropped by 2.7 percent.

A lack of investment in Germany also worried economists and companies. According to German commercial chambers' association DIHK, more than 10 billion euros (about 11.2 billion U.S. dollars) were needed to fill the funding gap in transport infrastructure alone. Many elements, including less bureaucracy, reliable energy policy, and better skilled workers were also needed to boost investment in other areas, it said in its annual report published on Tuesday.

In January, the German government cut its forecast for economic growth in 2016 to 1.7 percent from 1.8 percent. It pledged to strengthen public investment, support digitalization in industry, and take measures to stimulate private investment in a bid to ensure that "Germany will also be a global leading economic and industrial location in ten years." Endit