Germany's business climate falls: ‘We are once again becoming a Eurozone growth challenge’

30, Jul - NEWS

Clearly, the European Championship has not brought optimism to the German football team or its companies. Amid hopes of whether such a major event could revitalise the economy of Europe's locomotive, the country's most important confidence indicator, the Ifo index, fell to 87 points in July, confirming a pessimistic trend of three consecutive months and reversing all the optimism of the beginning of the year.
ING's head of macroeconomics Carsten Brzeski put it as follows in a note to clients: ‘Germany has once again become the Eurozone's growth problem.’

According to the Ifo Institute, which compiles the index, the business climate in the manufacturing sector has deteriorated significantly. In particular, a survey of companies in this sector ended with significantly worse assessments of the current situation. At the same time, expectations and the volume of orders also declined. ‘Capacity utilisation fell to 77.5%, i.e. six percentage points below the long-term average,’ said Clemens Füst, president of Ifo.

Political uncertainty and its impact on Germany

According to the IMF, confidence likely lies in the services sector, but the benchmark Ifo index fell again after rising in recent months. "This was mainly due to rising pessimism about expectations. Service providers were also less positive about the current situation,’ said Füst. Pessimism about the current situation also continues to prevail in trade and construction, and expectations for the coming months in these sectors are not very encouraging either.

Brzeski explains that the reason for this pessimism in the various sectors lies in the ‘weakening global economic outlook’. In particular, he points to political uncertainty in France and Germany, ‘as well as the possible effects of the US presidential election on Europe.’ It should be remembered that the rise of the far-right in France could lead to a rupture of the Franco-German axis, generating further instability and uncertainty for businesses in the two historically partnered countries. Despite the results and the ‘sanitary border’ set by other groups in the French parliament, uncertainty still reigns in the neighbouring country's politics.

On the other hand, in Germany, the ‘Traffic Light’ coalition led by Olaf Scholz has just presented a draft budget that generates considerable uncertainty in terms of debt. According to the draft, an additional 17 billion in debt must be issued to finance certain projects that many doubt will be constitutionally compliant. As for the US, the possible re-election of Donald Trump could lead to the imposition of 10% tariffs on all goods from any country, including the European Union, which creates significant uncertainty for German companies, many of which base their business on exporting goods.

The economy is stagnating

Overall, confirming the trend of a worsening business climate after three very pessimistic months, experts say the German economy is stagnating again. Europe's locomotive began the year with a surprise 0.2% GDP growth in the first quarter, confidence indicators were improving, which was a small ray of light for economic sectors and it was thought that the economy had already bottomed out and was picking up again.

‘This raised hopes that the pessimism of recent years was behind us and that the debate about whether Germany was the sick man of Europe could be put on hold again,’ said the ING expert. Putting things in perspective, though, the rationale for GDP growth in the first quarter was winter weather and a downward revision to the EU GDP forecast, so ‘it was not what we would call a sustainable and healthy growth story,’ Brzeski emphasises.

What is the economic outlook for Germany?

The improvement in confidence has been driven by an improving global economic outlook and slowing inflation. But now the US economy is cooling and the Chinese economy is at half speed, leading to weaker prospects for an export-orientated economy like Germany's. Brzeski predicts that ‘disappointing data in May suggest that the German economy may have stagnated again in the second quarter, and the latest confidence figures do not bode well for the third quarter.’

Nevertheless, he remains optimistic about the future. ‘Only a slight improvement in the industrial order book is needed for industrial production to return to growth, albeit from a low level,’ he says. In addition, more than a decade of real wage growth ‘should eventually loosen even the traditionally very tight wallets of German consumers,’ and despite political tensions, the government has just announced a new growth initiative to address the structural weaknesses of the German economy.

‘Unfortunately, this initiative is richer in words and intentions than in money, and so it will not bring immediate relief, but it may contribute to a very gradual improvement,’ but there is a chance that the economy will revive, albeit with a modest increase, in the second half of the year.