Gloomy Ifo fuels fears of second German recession in a year

[August 25, 2023]  By Maria Martinez

BERLIN (Reuters) -The mood among German businesses deteriorated more than expected in August, data showed, falling for the fourth month in a row and adding to fears that the economy may be heading for its second recession inside a year.

The Ifo institute said on Friday that its business climate index stood at 85.7, down from 87.4 in July. Analysts polled by Reuters had forecast an August reading of 86.7.

Assessments of the current situation fell to their lowest level since August 2020 and companies' expectations for the next six months were also increasingly pessimistic.

"The German economy is not out of the woods yet," Ifo president Clemens Fuest said.

Beset by high inflation and financing costs and a drop in exports that has hit the country's industrial sector hard, it fell into recession last winter.

The economy then posted zero growth in the second quarter compared to the previous three months, separate data from the statistics office showed on Friday.

Finance Minister Christian Lindner that, after a third consecutive quarter of contraction or stagnation, "new economic impulses are more important than ever".
 

A program of corporate tax relief worth billions of euros, would be a first step in that agenda, he said on messaging platform X, formerly known as Twitter.

Germany's coalition government last week failed to agree on a framework for that program.

The Ifo survey showed sentiment among German managers had become more pessimistic across all sectors in August.

Weak new orders are the main reason, according to the institute's head of surveys, Klaus Wohlrabe, adding that expectations among exporters had declined further.

A general view of a fruit and vegetable stand on a weekly market in Berlin, Germany, March 14, 2020. REUTERS/Annegret Hilse//File Photo

"Prospects of an economic recovery are presently not promising," said Claus Niegsch, an analyst at DZ Bank.

High interest rates, stubbornly high prices and a lack of impulses from foreign trade will continue to weigh in the second half of the year, Niegsch said.

"This means we are likely to slip into another recession in the last two quarters of this year before a recovery can begin next year," he said.

The Ifo survey chimed with flash PMI data released on Wednesday, which showed that German business activity contracted at the fastest pace for more than three years in August.

"Both surveys did come in below expectations and will do nothing to dispel the sense of gloom about Germany's economic prospects," said Andrew Kenningham, chief Europe economist at Capital Economics.

They point to the economy contracting again in the third quarter after stabilizing in the second, he said, agreeing with Niegsch that the economy would probably shrink further in both the third and fourth quarters.

"Today's data pours more cold water on those hoping that the country's economic weakness will be short-lived," added ING's global head of macro, Carsten Brzeski.

(Reporting by Maria Martinez, Editing by Friederike Heine, Mark Potter and John Stonestreet)

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