In December, business sentiment in Germany hit its lowest point since 2020, as highlighted by a recent survey from the ifo Institute. This decline is attributed to rising skepticism about the economic future, fueled by potential trade conflicts with the U.S. and uncertainties in domestic economic policies.
The ifo business climate index dropped to 84.7 in December from 85.6 the prior month, marking its lowest since May 2020 and falling short of the anticipated 85.5 forecast by economists. According to ifo President Clemens Fuest, the frailty of the German economy is becoming increasingly entrenched.
Although companies viewed their current conditions somewhat favorably, their outlook for the future turned more negative. Surprisingly, the current situation index rose to 85.1 from 84.3, surpassing the expected 84.0. In contrast, the expectations index fell to 84.4 from 87.0, against an anticipated increase to 87.5.
In manufacturing, the business climate significantly deteriorated, with companies expressing less satisfaction with their present situation and a more pessimistic view of the future. The manufacturing sector also witnessed a decline in order volumes and announced production cutbacks.
The service sector experienced a decline in business climate in December, driven by notably more doubtful expectations, despite a slight improvement in their current situation assessment. While the catering industry reported positive business during the Christmas season, concerns lingered within the transport and logistics sector for the forthcoming months. In trade, the upward trend in business morale from the prior two months did not continue, as companies reported reduced satisfaction with current business conditions and growing pessimism about the future.
On a positive note, business confidence in the construction sector saw an improvement in December, with companies remaining slightly more optimistic about their current situation, although their expectations dimmed.
ING economist Carsten Brzeski remarked that the ifo index reflects growing concerns among German businesses regarding the nation’s growth prospects. Capital Economics anticipates Germany's economy to grow by under 0.5 percent in 2025. Economist Jack Allen-Reynolds from Capital Economics expects GDP growth next year, driven by increasing real incomes and a more lenient monetary policy.
Meanwhile, Commerzbank forecasts a modest 0.2 percent increase in German GDP next year, with economist Jorg Kramer attributing existing challenges mainly to the manufacturing sector, which faces a profound structural crisis. Kramer also expressed skepticism that decreasing ECB interest rates would significantly benefit the economy, predicting only a modest recovery after stagnation during the winter half-year.
According to the Purchasing Managers' survey results released on Monday, the German private sector's contraction moderated in December, thanks to a minor upturn in services activities. The composite output index rose to 47.8, an improvement from November's nine-month low of 47.2.
Germany, the largest economy in the euro area, experienced marginal growth of 0.1 percent in the third quarter following a contraction, thereby avoiding a technical recession.
The material has been provided by InstaForex Company -
www.instaforex.com
