Sentiment at the top of the German economy has deteriorated for the third time in a row. Concerns about the economy are increasingly pressing, and there is no sign of recovery yet.
Economic sentiment in Germany unexpectedly deteriorated at the start of the second half. The ifo business climate in July fell to 87.3 points in July from 88.6 points in the previous month, the third consecutive decline, the ifo institute in Munich announced today in a survey of around 9,000 executives. Experts had expected a weaker decline.
The business climate is cloudy across all sectors under scrutiny. In construction, the gauge fell to its lowest level since February 2010. The industry has long been plagued by sharply rising interest rates and high construction costs. “The economic situation in Germany is getting darker,” says ifo president Clemens Foster. Companies in particular are significantly more dissatisfied with their current business. Business expectations also fell again.
No bright spots in the industry
Following the so-called “winter recession”, Germany is now under threat of a “summer recession”, according to the ifo institute. “The weak phase of the German economy is being extended,” said Klaus Wohlrabe, head of ifo surveys. Gross domestic product is expected to fall in the third quarter following a largely stagnant spring.
One of the reasons for this pain is continued weakness in the industry. “With fewer delivery bottlenecks, companies can better process existing orders,” Wollrabe said. “But there are fewer and fewer new orders.”
There is little hope in sight for the industry. At the same time, the mechanical and electrical engineering industries, as well as the chemical industry, also continued to be weak for some time. Demand abroad is also rather weak. “We don’t expect any momentum on the export front,” the ifo expert said.
economic dispatch recession signal
The German economy has contracted quarter-on-quarter in late 2022 and early 2023 and has been in a so-called technical recession ever since. The Bundesbank said the economy should pick up slightly again in the second quarter. But the risk of a recession extending into late summer has increased sharply. The latest Purchasing Managers Index is in line with this. The signals suggest the economy may have shrunk given the drop in orders early in the second half.
Jörg Kramer, chief economist at Commerzbank, believes that the overall decline in leading indicators indicates that “the German economy will contract again in the second half of the year.” “There are also signs of recession in the rest of the euro zone,” Cramer said. “We are in a recession and we are not going to get out of it anytime soon,” said LBBW economist Jens-Oliver Niklasch.
“Tightening monetary policy has a full braking effect”
Jörg Zeuner, Chief Economist at Union Investment, examines the link between the economy and the stock market: “The continued decline in the ifo business climate index and the rise in stock market prices show once again that the real economy and financial markets are closely linked but not always mirror images of each other.”
Zerner believes that although the capital market expects the end of the interest rate hike cycle and has great hopes for the topic of artificial intelligence, the full braking effect of tightening monetary policy is now having an impact on the real economy. “That’s why we still expect little economic momentum this year.”