A major European bank has warned that the German economy is “stuck in a recession” as months of bad news have created seemingly endless negative sentiment and exacerbated key structural issues.
Head of Global Macroeconomic Research at ING I painted A bleak picture for Germany’s struggling economy after a key indicator of activity posted its fifth straight monthly decline.
The Ifo business climate index, which measures economic activity in the manufacturing, services, trade and construction sectors, fell to 85.4 points in September, compared to 86.6 points in August, indicating a decline in activity.
“The German economy is back to where it was a year ago: growth lagging behind the eurozone with little sign of an imminent improvement,” said Carsten Brzeski of ING.
“After the economy contracted in the second quarter, all available sentiment indicators for the first two months of the third quarter offer very little reason for optimism.”
The broad-based slowdown in business activity follows a prolonged period of negative production PMI, which has been in contraction territory for more than two years.
Germany is still suffering from the disruption of cheap Russian oil and gas following the country’s invasion of Ukraine, which has increased input costs for companies.
The decline in demand from China, one of its main trading partners, has exacerbated the ongoing slump in the production sector.
But the most publicized issue in recent months has been the crisis gripping Germany’s beloved auto sector. Consumers’ slower-than-expected shift to electric vehicles has left Volkswagen and BMW licking their wounds after an ambitious early bet on the technology. At the same time, both companies have fallen victim to a broader slowdown in demand in China.
Volkswagen, Germany’s biggest employer, has scrapped a 30-year agreement to protect jobs and signaled it may have to close a German factory for the first time in its history. The company is in talks with unions over wage agreements amid a €10 billion cost-cutting plan.
The plight of German carmakers, Brzeski says, “is just another example of ongoing structural and cyclical problems, but unfortunately it may also be fueling negative sentiment; it’s a perfect vicious cycle.”
Meanwhile, other international companies have decided to postpone their plans to expand in Germany. Intel announced that it has postponed its plans to build a €30 billion factory in the country by up to two years, causing a split within the government over Germany’s commitment of around €10 billion to develop the plant.
There is little cause for optimism on the horizon, with German consumers and businesses concerned about a possible economic slowdown in the United States, as well as rising geopolitical tensions and a tense political environment at home.
The Ifo index is likely to improve by the end of the year, Brzeski says.
“This will certainly be a cyclical improvement from very low levels, which will not at all change the image of a country stuck in recession.”