Germany is heading for difficult economic times. This is shown by the Ifo business climate, Germany’s most important leading economic indicator. In July, the mood in German companies deteriorated significantly. The business climate fell by 3.6 points to 88.6 points compared to the previous month, as the Ifo Institute announced on Monday in Munich.
It is the lowest level since June 2020. Analysts had expected a slowdown, but on average only expected a drop to 90.1 points. To calculate the index value, the business climate is normalized to the average of the base year (currently 2015).
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“Germany is on the threshold of recession,” commented Ifo President Clemens Fuest. “High energy prices and the threat of gas shortages are weighing on the economy.” In detail, the business climate deteriorated in all economic sectors considered, and clearly so: In industry, pessimism about the future is greater than it has been since April 2020.
“This runs through almost all industrial sectors.” Among the service providers, the mood turned again after the recent great optimism, also in the tourism sector and hospitality industry.
Several developments are currently weighing on the German economy. The risk of a natural gas crisis, ongoing supply problems in foreign trade and high inflation are likely to weigh most heavily.
In addition, there are rising capital market interest rates, which increase the borrowing costs of companies and consumers and thus dampen investment and consumer spending. Last week, the European Central Bank (ECB) raised interest rates for the first time in eleven years. Many other central banks have been on a rate hike course for much longer.
Bank economists commented on the Ifo survey with little hope. “A recession can hardly be avoided,” said Thomas Gitzel, chief economist at VP Bank. The burdens of high inflation, the looming energy crisis and supply chain difficulties are too much.
