Gloomy Outlook for the German Business Climate

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on Sep 25, 2012

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Gloomy Outlook for the German Business Climate

While EU leaders are exploring options for resolving the problems in the debt-ridden Eurozone countries, German companies seem to be increasingly sceptical about the future prospects of Europe’s largest economy. On 24 September 2012, the Financial Times reported that main business climate index of the Ifo Institute in Munich declined to its lowest level in more than two and a half years, adding to concerns that Germany might be headed for an economic downturn.

The Ifo Business Climate Index for Germany’s industry and trade, which questions executives at 7,000 German companies in manufacturing, construction, wholesaling and retailing, fell for the fifth consecutive month to 101.4 in September from 102.3 in August, its lowest level since February 2010. In addition, Bloomberg reports that IFO’s gauge of executives’ expectations declined from 94.2 to 93.2, the lowest since May 2009.

“Today’s IFO index shows that German companies remain sceptical about the economic impact of Mario Draghi’s magic,” noted Carsten Brzeski, an ING (NYSE:IND) economist, as quoted by the FT. “It looks as if German businesses realise that keeping the Eurozone alive will not return growth quickly.” Earlier in September, the president of the European Central Bank (ECB) announced a revamped programme for buying government bonds of peripheral Eurozone countries.

!m[](/uploads/story/451/thumbs/pic1_inline.png)The FT reports that while German export-oriented companies have benefitted from a weak euro and low interest rates, they have also experienced lower demand both globally and within the Eurozone, which is Germany’s biggest export market. As noted by Bloomberg, the European Commission forecasts an economic contraction of 0.3 for the Eurozone for 2012. The German economy is expected to expand by 0.6 percent in 2012, relative to a 3 percent expansion in 2011, according to the Federal Labour Agency’s IAB research institute.

The FT quotes Jennifer McKeown, economist at Capital Economics, who pointed out in a note that while Germany might have avoided recession in the third quarter, “it seems like only a matter of time before the economy starts to contract.” Bloomberg in turn quotes Berenberg Bank’s chief economist Holger Schmieding as saying that despite the “activist stance” of the ECB, “the German economy has not yet turned around the corner”.

Bundesbank, however, presented a more positive view of the German economy in its monthly report, also released on September 24. The Bundesbank said that the German economy was off to a “very good start” to the third quarter and recent data “speak in favour of Germany continuing its upward course for now.” Yet, the bank also noted that the economic outlook was “marked by great uncertainties.”
German consumer confidence on the other hand is expected to hold steady in October, with Bloomberg reporting on September 25 that the Germany-based market research company GfK (FRA:GFK, ETR:GFK) forecast that its consumer-sentiment index, based on a survey of about 2,000 people, will remain at 5.9 for a second straight month. “The fear of German consumers that the economy will slip into recession did not increase further,” GfK noted in a statement, as quoted by Bloomberg. “But uncertainty of consumers with regard to their future financial prospects has risen in recent weeks.”