German economy is on the brink of recession after business confidence plunged to its lowest level in seven years. Munich-based research group, IFO Institute said, "Worry lines among German business leaders are getting deeper and deeper." Its monthly confidence index fell to just 94.3 points in August, down from 95.8 in July, the weakest reading since November 2012.
In the latest sign that Europe's largest economy is struggling, the survey of nearly 10,000 German companies found that managers were gloomier about the current economic situation, and more pessimistic about the outlook over the next six months. Head of IFO, Prof Clemens Fuest forecasted that Germany's GDP would shrink this quarter, having already contracted by 0.1 per cent in the previous three months. That would put the economy into a recession for the first time since 2013.
He said, "Everything we see at the moment means there are ever more indications of recession in Germany, meaning two quarters of negative growth." Germany's industrial sector has been badly hurt by the US-China trade war, with exports falling in the last quarter. Manufacturing output has contracted, as factories have been hit by falling orders. The slowdown has now spread to Germany's service sector. Companies in the sector have reported a deterioration in business conditions, making them more sceptical about growth prospects.
"This is very bad news indeed. It's not just manufacturing where the decline continues, but we now see that the weakness is really affecting the services sector which is large and important for the German economy," Fuest said. Senior economist at Picter Asset Management, Frederik Ducrozet said Germany's manufacturing sector was already in recession territory, which has led to "spillover" effects in the rest of the domestic economy this summer. He tweeted, "German IFO: Manufacturing in recession territory, but not 2009-like Armageddon. Spillovers to domestic economy got worse during summer with the largest cumulated drop in services since the GFC.
Head of market strategy at financial group Nordea, Mikael Sarwe said the IFO survey was giving a clear recession warning. He tweeted, "Even worse recession indication from IFO than before." The German government is under growing pressure to respond to the downturn by borrowing more to bolster spending. Germany's "debt brake" law compels politicians to draw up a balanced budget, but some economists argue that Berlin should now launch a stimulus programme.
