Germany's business outlook in October has improved, further indicating that the country's economic downturn may be coming to an end. The German October IFO Business Climate Index rose from 85.4 last month to 86.5, higher than the expected 85.6.

Secondly, Germany's October IFO Business Expectations Index increased from 86.4 in September to 87.3, marking the highest level since June and better than economists' forecasts. The indicator measuring current conditions also improved. Germany's October IFO Current Assessment Index rose from 84.4 last month to 85.7, also exceeding expectations.

Ifo President Clemens Fuest said in a statement on Friday, "Expectations are brighter, but there is also skepticism. The German economy has temporarily stopped its decline."

Although the sentiment in Europe's largest economy remains subdued, there are at least some signs of stabilization. A survey published by S&P Global on Thursday showed that the rate of contraction in the private sector economy slowed, with strong growth in the service sector offsetting the long-term weakness in manufacturing. Germany's October SPGI Manufacturing PMI preliminary value rose from 40.6 last month to 42.6, higher than the expected 40.8. Germany's October SPGI Composite PMI preliminary value rose from 47.5 last month to 48.4, higher than the expected 47.6.

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The German central bank also said this week that it expects GDP to remain roughly flat in the fourth quarter, while Germany's GDP experienced a slight recession in the six months ending in September. With consumers still hesitant, there are few signs that the economy will rebound strongly soon.

The German industrial sector has been the biggest source of concern, with businesses lamenting high energy costs, excessive bureaucracy, and political uncertainty.

As the largest economy in the eurozone, Germany's economic downturn has sounded the alarm for the European Central Bank. The ECB cut interest rates for the third time this year last week, and for the second consecutive time, lowering the deposit facility rate to 3.25%. For policymakers, the risk is that below-average economic expansion will lead to inflation falling below the 2% target, as was the case for nearly a decade before the pandemic.

Money markets expect the ECB's monetary policy to provide more support for the economy. Investors have now increased their bets on ECB rate cuts. They expect a series of rate cuts by the ECB, with the deposit facility rate falling to 2% by mid-2025. The swap market implies that there is a 45% chance that the ECB will cut rates by 50 basis points at its last meeting of the year. Prior to the ECB's decision to cut rates by 25 basis points last week, the market only expected a 25 basis point cut in December.