Drop in German business morale points to longer recession
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[June 26, 2023] BERLIN
(Reuters) -German business morale worsened for the second consecutive
month in June, a survey showed on Monday, indicating that Europe's
largest economy faces an uphill battle to shake off recession.
The Ifo institute said its business climate index fell to 88.5 this
month from 91.5 in May. A Reuters poll of analysts had predicted a
smaller drop to 90.7 in June.
"Sentiment in the German economy has clouded over noticeably," Ifo's
president Clemens Fuest said.
China's weaker than hoped for economic performance since its reopening
from tight COVID-19 lockdowns, a looming U.S. recession and ongoing
monetary policy tightening seem to be weighing on German company
sentiment, said Carsten Brzeski, global head of macro at ING.
"What is clear is that the optimism at the start of the year seems to
have given way to more of a sense of reality," Brzeski said.
Indeed, expectations were much more pessimistic, with the related Ifo
index falling to 83.6 from May's 88.3. Companies also assessed their
current situation more poorly, with that index falling to 93.7 from
94.8.
The economy faces the prospect of a longer recession as domestic demand
and the expectations of exporters have both weakened, Klaus Wohlrabe,
head of Ifo surveys, told Reuters in an interview on Monday.
"The probability has increased that gross domestic product will also
shrink in the second quarter," he said.
UPBEAT BUBA
By contrast, the Bundesbank said on Monday in its monthly report that
the recession in Germany is expected to end in spring, with gross
domestic product rising slightly in the second quarter.
"Private consumption should bottom out," experts from the German central
bank wrote in the report. "Thanks to strongly rising wages, the real
disposable incomes of private households are stabilising despite
inflation remaining very high."
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A worker at German manufacturer of silos
and liquid tankers, Feldbinder Special Vehicles, moves rolls of
aluminium at the company's plant in Winsen, Germany, July 10, 2018.
REUTERS/Fabian Bimmer/File Photo
The decline in the Ifo is in line with the drop in the flash
purchasing managers index, published on Friday. There was a
combination of a slower rise in service sector business activity and
a deepening downturn in manufacturing output, that report showed.
In the Ifo survey, manufacturing posted the largest deterioration on
the month. "It is clear that industry remains under pressure from
waning demand, in line with Friday's PMIs which saw industry in the
euro zone's biggest economy deep in contractionary territory amid
rapidly shrinking backlogs and destocking," said Mateusz Urban,
senior economist at Oxford Economics.
The Bundesbank, however, said the spring quarter uptick would be
supported by German industry's ability to weather a continued
decline in demand thanks to lower energy prices, easing of supply
bottlenecks and full order books.
Economists were less optimistic.
"The slump in the German Ifo, together with the drop in the PMIs,
suggests that German GDP probably contracted for the third quarter
in a row in the second quarter," said Franziska Palmas, senior
Europe economist at Capital Economics. The economic research firm
expects the economy to remain in recession throughout 2023.
"We feel confirmed in our forecast that the German economy will
shrink again in the second half of the year," Commerzbank's chief
economist Joerg Kraemer said.
(Reporting by Maria Martinez, Additional reporting by Rene Wagner,
Editing by Friederike Heine, Matthias Williams and Hugh Lawson)
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