German business morale unexpectedly declines, GDP shrinks by 0.3%

06 Feb, 2024

German business morale unexpectedly declines, GDP shrinks by 0.3%

German business morale took an unexpected hit in January, marking its second consecutive monthly decline amid ongoing struggles within Europe's largest economy to emerge from recessionary pressures. The initial optimism seen in the preceding months has swiftly dissipated, replaced by concerns of another challenging year ahead.

According to the Ifo institute, the business climate index dropped to 85.2 from December's slightly revised figure of 86.3, defying expectations of improvement to 86.7. "The German economy is stuck in recession," remarked Ifo president Clemens Fuest, reflecting the somber sentiment prevailing among analysts.

In 2023, Germany's gross domestic product (GDP) contracted by 0.3%, a trend anticipated to persist this year with ING economist Carsten Brzeski forecasting a further decline of -0.3%. Factors contributing to this economic downturn include persistent inflation, soaring energy costs, weakened foreign demand, and budgetary strains prompting subsidy cuts.

Moreover, disruptions in global trade, exemplified by Houthi attacks in the Red Sea, have heightened concerns for Germany's export industry. Despite this, supply chains have remained resilient, as noted by Ifo's head of surveys Klaus Wohlrabe.

The onset of 2024 witnessed widespread farmer protests and nationwide rail strikes, underscoring growing discontent with Chancellor Olaf Scholz's economic policies. Amidst these challenges, the Ifo revised down its growth forecast, anticipating a meager 0.7% rebound this year.

Further exacerbating Germany's economic woes, data released in November revealed a 7.4% month-on-month decline in incoming orders within the construction industry, indicating prolonged struggles in the property sector. Despite these challenges, optimism for growth remains subdued, with the Ifo's current assessment and expectations components dimming in January.

"Unfavourable location conditions and unsettling economic policy are major problems," remarked Alexander Krueger of Hacuk Aufhaeuser Lampe, highlighting the daunting road ahead for Germany's economic recovery.