German Business Confidence Plummets as Recession, Deindustrialization Pummel Economy
12:02 GMT 25.08.2023 (Updated: 12:04 GMT 25.08.2023)
© AFP 2023 / INA FASSBENDER
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The Central European industrial giant and EU economic powerhouse has fallen on hard times over the past year-and-a-half amid the ongoing crisis in economic ties with Russia. Along with inflation and recession, Berlin is facing the stark prospect of widespread deindustrialization as doing business in Germany becomes unprofitable.
A key German business confidence ranking has reported its fourth consecutive, unexpectedly large drop, plunging to a ten-month low, with assessments of the current business climate in the country hitting their lowest point since August 2020.
According to figures released by the Munich-based Ifo Institute on Friday, local businesses’ morale hit 85.7 points in August, dropping from 87.4 points in July, and below the 86.7 points predicted by observers.
Ifo Institute’s rankings are based on the feedback of about 9,000 German businesses in the manufacturing, services, trade, and construction sectors. Respondents assess the “current business situation” and “expectations” over the coming six-month period, and have the option of characterizing the current situation as “good,” “satisfactory,” or “poor,” and expectations for the future as “more favorable,” “unchanged” or “less favorable.”
Ifo Business Climate ranking, showing German business managers' confidence (or lack thereof) in the state of the economy and expectations for the future.
© Photo : Ifo Institute
In its August rating, Ifo pointed to a “further darkening” of overall sentiment among German business managers, with companies “increasingly pessimistic about the months ahead.”
“In manufacturing, the Business Climate Index fell. Companies were particularly less satisfied with their current situation; this indicator dipped into negative territory for the first time since October 2020. Expectations remained starkly pessimistic. Companies complained ever more loudly of a decline in new orders,” Ifo’s report noted.
The economic watchdog observed a similar “cooling” in the service sector, with managers “expecting a further deterioration,” and complaining that “the weakness in manufacturing” is “weighing on the transport and logistics industry.”
“The Business Climate Index fell in trade too,” with businesses assessing “their current situation as considerably more negative” and “the outlook also turn[ing] even gloomier,” Ifo noted.
Finally, in construction, the index also “continued its nosedive,” with companies “noticeably less satisfied with their current business situation” and “pessimism concerning the coming months becoming even more widespread.”
Ifo's Business Climate ranking shows confidence (or lack thereof) of German businesses in the state of the economy by sector, including manufacturing, services, trade and construction.
© Photo : Ifo Institute
The drop in German business confidence comes on the heels of the release of fresh GDP data by the Federal Statistical Office on Friday, showing that GDP growth in the second quarter of 2023 declined by 0.6 percent (price adjusted) compared to a year earlier, leaving the country in a technical recession.
“Like in Germany, the economic development stagnated in the European Union as a whole in spring 2023. However, there were differences regarding the other large EU member states,” the Federal Statistical Office said in a note accompanying the new data.
“The largest quarter-on-quarter increases in the price, seasonally and calendar adjusted GDP were seen in France (+0.5 percent) and Spain (+0.4 percent) in the second quarter of 2023. By contrast, economic performance declined by 0.3 percent in Italy. At +0.6 percent quarter on quarter, the economic development was somewhat better in the United States than in most European countries,” the office added.
Germany and other European economies both large and small were driven into a recession in 2022 after moving to reject Russian oil and gas purchases to try to “punish” Moscow for its special military operation in Ukraine. Russian officials warned at the time that the move would result in a catastrophic loss in competitiveness among German industry.
Last month, a survey found that 77 percent of managers of large German corporations considered high energy costs as a key hindrance to their competitiveness, with 58 percent fearing Germany has “passed its zenith” economically, and just 22 percent expecting the economy to pick up again.
US lawmakers’ passage last year of the ‘Inflation Reduction Act’, a mammoth $783 billion energy security package which provides lavish subsidies for manufacturers setting up shop on US soil and producing “green” products such as electric vehicles, resulted in a further hit against German competitiveness, and escalated fears of widespread and “irreversible” deindustrialization.
Washington poured salt in Berlin’s wounds by offering Germany US fracking-derived natural gas, whose exports to Europe surged by more than 137 percent in the first 11 months of 2022 alone, and whose costs are up to 40 percent higher than Russian pipeline gas, according to Russian estimates.
8 August 2023, 09:34 GMT
