German companies have become increasingly gloomy on the economic outlook, according to a closely watched business confidence index that adds to signs that Europe’s largest economy is heading for another downturn.
“The German economy is not out of the woods yet,” said Clemens Fuest, president of the Munich-based Ifo Institute, after its monthly survey found confidence falling in all four main sectors: manufacturing, services, retail and construction.
Its overall business confidence index fell 1.7 points to a 10-month low of 85.7, as companies become more pessimistic both about current conditions and the next six months. Economists polled by Reuters had expected a smaller drop to 86.7.
The downbeat findings mirror those earlier this week in a survey of purchasing managers, which found German companies suffered the steepest decline in activity for more than three years, amid falling new orders, output and inventories.
The grim economic outlook has prompted investors to cut their bets on the European Central Bank raising interest rates for the tenth consecutive time at its meeting on September 14.
“The broad-based decline in leading indicators points to a renewed contraction of the German economy in the second half of the year,” said Christoph Weil, an economist at German lender Commerzbank. “This strengthens the position of the many doves on the ECB governing council, which is unlikely to raise its key rates again at the next meeting.”
However, one member of the ECB rate-setting governing council — Germany’s central bank boss Joachim Nagel — said it was “much too early to think about a pause” in raising borrowing costs before he has seen more data — including next week’s inflation figures for August.
Eurozone inflation has halved since reaching a record high of 10.6 per cent in October and economists polled by Reuters expect it to slow further to 5 per cent this month.
But Nagel told Bloomberg at the US Federal Reserve’s Jackson Hole conference there was still “some way to go” to reach the ECB’s 2 per cent target and warned core inflation — excluding energy and food — remains “sticky”.
The German economy has been slower to recover from the coronavirus pandemic than the US or the rest of the eurozone. A sharp downturn in manufacturing has hit Germany’s vast industrial base particularly hard, meaning the country has not enjoyed positive growth for three quarters.
Another sign of weakness came on Friday, with official figures showing new orders in the German construction sector fell 2.7 per cent in June from the same month a year ago, underlining how rising interest rates have hit activity in the country’s housing market.
Nagel said his country was “going through some, let me say, complicated months” but he predicted it would recover next year. The Bundesbank forecasts German gross domestic product will shrink 0.3 per cent this year before growing 1.2 per cent in 2024.
Revised German GDP data, also published on Friday, confirmed last month’s estimate that output stagnated in the three months to June, compared to the previous quarter. Weaker exports offset a positive contribution from investment, inventories and public spending.
“High interest rates, persistently high prices and a lack of impetus from foreign trade, which is so important for Germany, will continue to weigh on the economy in the second half of the year,” said Claus Niegsch, industry analyst at German lender DZ Bank, predicting the country would “slip into another recession in the last two quarters of this year before a recovery can start next year”.
Source: Economy - ft.com
