German Business Expectations Fall, Dampening Hope of Rebound

(Bloomberg) — German business expectations worsened for the first time since August, undermining hopes that a recovery in Europe’s biggest economy will take hold early next year.

Author of the article:

Bloomberg News

Alexander Weber

Published Dec 18, 2023  •  2 minute read

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(Bloomberg) — German business expectations worsened for the first time since August, undermining hopes that a recovery in Europe’s biggest economy will take hold early next year.

An expectations gauge by the Ifo institute fell to 84.3 in December from 85.1 the previous month. Analysts had expected a slight uptick. An index of current conditions also dropped.

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“The economy is weak, and we’ve been waiting for a recovery now for some time, and it’s not coming,” Ifo President Clemens Fuest said on Bloomberg TV. “This is worrying.” 

The country may witness a shallow recession in the second half as it continues to suffer from hesitant consumers, weak global demand and geopolitical tensions. While the previous expectation was for stagnation in the fourth quarter, the latest data makes a second consecutive contraction more likely, Fuest said. 

Government haggling over next year’s budget has heightened uncertainty in recent weeks. Olaf Scholz’s government agreed on measures including subsidy cuts and a higher carbon price to plug a hole caused by a Constitutional Court ruling last month. 

While the direct impact on growth may be limited, “the issue is maybe more the fact that there is a lot of uncertainty about economic policy going forward,” Fuest said. “What we would need is a convincing economic-policy strategy to get back to growth, a strategy for a recovery. And this strategy is missing completely.”

Business surveys by S&P Global on Friday also showed private-sector activity worsening this month, pointing to further contraction. Momentum deteriorated particularly in the services sector.

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The Bundesbank still expects growth to return next year, as exports recover and household incomes improve amid slower inflation. But it now predicts just 0.4% expansion in 2024 — down from 1.2% previously, according to a report on Friday. 

For the fourth quarter, it predicts another small contraction amid protracted weakness in industry and construction.

Meanwhile, inflation is seen accelerating to about 4% in December after energy aid damped costs last year. An increase in carbon prices and strong wage growth in services mean inflation will probably remain elevated also at the start of 2024.

The European Central Bank’s rate-hiking campaign has also weighed on Germany’s economy. Officials are now widely expected to lower borrowing several times next year, which may offer some support. 

—With assistance from Joel Rinneby, Kristian Siedenburg, Francine Lacqua, Marton Eder, Zoe Schneeweiss and Jana Randow.

(Updates with Bundesbank starting in ninth paragraph.)

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