Germany's Economic Downturn Business Morale Wanes

29 Jan, 2024

Germany's Economic Downturn Business Morale Wanes

German business morale is on a downward spiral once more, marking a stark contrast to a brief period of optimism now overshadowed by fresh concerns. The private sector's morale in Germany unexpectedly plunged for the second consecutive month in January, as revealed by data released by the Ifo institute on Thursday.

This pessimistic outlook follows a challenging year for Europe's largest economy, grappling with persistently high inflation, soaring energy costs, and sluggish foreign demand. Ifo reported a decline in its business climate index, tracking the sentiment of approximately 9,000 German companies, dropping to 85.2 from December's slightly revised 86.3.

Among various sectors, both retail and construction witnessed deteriorating prospects, alongside a notable downturn in the service industry. Although there was a slight improvement in confidence among industrial producers in January, the overall sentiment remained predominantly pessimistic.

This decline follows an unexpected drop in December, following a brief climb in November. Analysts had anticipated further increases for both December and January, but their expectations were not met.

According to Ifo president Clemens Fuest, "Sentiment in German business has clouded over, and the German economy is stuck in recession." ING economist Carsten Brzeski noted that ongoing strikes by train drivers and disruptions in the supply chain due to the Red Sea military conflict have further dampened the mood. Tesla announced a temporary halt in most of its production near Berlin at the end of January due to marine traffic disruption caused by Houthi attacks.

Furthermore, a court ruling has compelled the German government to hastily reconsider its 2024 budget, resulting in anticipated spending cuts. Ifo's experts foresee reduced growth in the German economy as a consequence of these cuts. Brzeski predicts another mild recession this year, projecting a GDP contraction of 0.3%.

"This would mark the first time since the early 2000s that Germany has experienced a two-year recession, albeit potentially a shallow one," Brzeski commented.