German business confidence plummeted sharply in July according to the ifo institute, whose president said that Germany is “on the edge of a recession .”
The overall index fell to 88.6 points in July, down from 92.2 points in June, the lowest since June 2020, the German research and policy institute said on July 25.
The ifo Business Climate Index is based on a survey of around 9,000 managers across various manufacturing and service industries in Germany.
German companies expressed concern about their situation, and expect that business will become more challenging in the coming months. Clemens Fuest, President of ifo stated in a statement.
“Surprising energy prices and a potential gas shortage threaten the economy,” Fuest stated. “Germany is at the edge of recession .”
Pessimism Across the Board
CA The confidence index’s various gauges for business sectors declined.
The factory index “plummeted,” Fuest said, as pessimism in the manufacturing sector climbed to its highest level since April 2020, the height of pandemic lockdowns.
The service sector gauge “worsen substantially” with the mood changing even within the tourism and hospitality industries that were recently buoyed by optimism during the peak tourist season.
Morale in the construction industry “deteriorated notably,” with the future expectations component showing “deep pessimism” and the current conditions part of the index falling to its lowest since April 2016.
Fuest stated that the trade sector indicators “took an nosedive” and noted that all German retail segments are pessimistic about their future.
German GDP Forecast Downgraded
The economic outlook for Germany has declined in the eyes international analysts and agencies. With the International Monetary Fund’s (IMF), revising down its forecasts for GDP growth in Europe’s economic powerhouse in light of rising energy prices and inflation, the IMF is now predicting that it will see a decline in economic growth.
At the beginning of 2022, the German economy was showing signs of overcoming the problems that had held down economic growth in the year prior, the IMF said in a recent note.
“Supply and manufacturing bottlenecks which had hindered production were decreasing, the agency stated. “Services were opening again after the country emerged form a severe winter variant of the Delta variant,” it said.
But this changed following Russia’s invasion and disruption of energy markets, as Western countries placed sanctions which have caused economic damage to their economies.
“Inflation and energy prices soared and consumer confidence dropped, while foreign demand for Germany’s exports declined,” said the IMF.
The IMF has downgraded its German GDP forecast for 2022 from 2.1 percent to 1.2 percent. The picture looks even bleaker for 2023, for which the IMF in April expected 2.7 percent growth but now predicts 0.8 percent.
“Uncertainty is very high, with risks to the baseline growth forecast skewed downward and risks to the inflation forecast skewed upward,” the IMF wrote in a separate note.
Inflation was 8.2 percent in Germany in June. This is down from the 8.7 percent pace in May, according to the Federal Statistics Office.
The biggest factor was energy prices, which in June jumped 38 percent over the year.
‘More Recessionary Signals’
Interview with ING analysts. They stated that their dismal reading of business confidence has reinforced the concern that Germany’s economy may have suffered a contraction in the second quarter.
“Today’s Ifo index illustrates that the list of downside risks for the German economy is getting longer and longer,” Carsten Brzeski, Global Head of Macro for ING Research, said in a note.
“More Recessionary Signals” was Brzeski’s main takeaway from the series of pessimistic confidence gauge readings.
Brzeski stated that ING analysts view “more downside risks than upside risk to the outlook,” with Germany’s largest threat being disruption to its energy supply.
” Currently in the base scenario, with continued supply chain frictions and uncertainty, and high commodity and energy prices due to the ongoing war in Ukraine,” Brzeski stated.
Germany’s economy grew 2.9 percent in 2021.
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