Germany facing recession: Ifo business climate index collapses

Die signs of an impending recession increase. The mood in the executive floors of the German economy deteriorated significantly in July, as the business climate index published on Monday by the Munich Ifo Institute shows. The barometer, which is based on a monthly survey of around 9,000 companies and is considered the most important leading indicator for the German economy, fell to 88.6 points after 92.2 points in June.

This is the lowest value since July 2020. “High energy prices and the threat of gas shortages are weighing on the economy,” said Ifo President Clemens Fuest. “Germany is on the threshold of recession.”

The pessimism ran through all sectors. The companies were not only less satisfied with their current business situation, they also expected “significantly worse business” in the coming months. Industrial companies looked to the future with more concern than they did in April 2020, shortly after the outbreak of the corona pandemic. Even in the service sector, where confidence had recently prevailed, especially in the hospitality and tourism sectors, expectations collapsed in July.

“Above all, the fear of a prolonged gas supply stop in connection with the maintenance of Nord Stream 1 is likely to have clouded the business prospects of many companies at the time of the survey,” commented KfW Chief Economist Fritzi Köhler-Geib. There was initially no complete stop to deliveries, but the uncertainty about the energy supply still remains “enormous”.

Various burdens on the economy

In addition, the high prices reduced the demand for goods and services, said Dekabank-Chefvolskwirt Ulrich Kater. Companies reduced supply because transport problems and inflation made production unpredictable. “The German economy is at least facing a phase of stagnation, if not even contraction,” warned Kater.

Last had the Federal Bank lowered their expectations of the performance of the German economy, i.e. the development of gross domestic product (GDP). “From today’s perspective, GDP growth in the current quarter is likely to be somewhat weaker than expected in the base scenario of the Bundesbank projection of June 2022,” says the central bank’s July monthly report published on Friday.

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