IFO index falls again
“The dry spell of the economy is prolonged”
08/25/2023 4:32 p.m
The stagnation in economic output in the spring is increasingly turning out to be a brief respite. The mood is deteriorating in almost all sectors. The industry in particular is sagging. Orders are missing. Tender hopes rest on consumption. However, no expert now expects growth in the near future.
The German economy did not find its way back onto the road to success in the spring and is headed straight for the next recession, albeit a shallow one. The Federal Statistical Office confirmed that GDP in the second quarter stagnated at the level of the beginning of the year, after falling twice earlier. The fact that there are no signs of a turnaround was made clear once again by the IFO business climate. Because the mood in the executive floors of the German economy deteriorated again in August. Economists see Germany facing a mixture of cyclical and structural problems for which no quick solutions are in sight.
The GDP figures make it clear where there are currently short-term problems in the economy: private consumption stagnated, private households continued to suffer from the increased expenditure for everyday life. At least the labor market was stable. KfW chief economist Fritzi Köhler-Geib is counting on “a revival of consumption for the second half of the year, which is now benefiting from noticeably rising wages and decreasing inflationary pressure after the slump last winter”, as she wrote in a comment.
For the former economic driving force, the manufacturing sector, no one wants to issue a hopeful forecast at the moment. In addition to the cyclical stress factors such as China’s economic weakness, the feared US recession and the unprecedented tightening of monetary policy, ING Europe chief economist Carsten Brzeski sees a whole range of structural problems: “The ongoing war in Ukraine, demographic change, the current energy transition and the lack of new investments in digitization, infrastructure and education will have a structural impact on the German economy in the coming years,” he wrote.
The decline in headline inflation and the actual decline in energy and food prices, combined with higher wages, should support private consumption in the second half of the year. However, he still sees the German economy in a twilight state between stagnation and recession.
The IFO index also points in this direction. In August, it fell from 87.4 to 85.7 points on a monthly basis. It was the fourth straight decline. Economists had forecast a smaller decline. The index of the assessment of the situation and the index of business expectations fell to 82.6 points. “The dry spell in the German economy is getting longer,” the economic researchers commented on the result.
Negative mood solidifies
In the manufacturing sector, companies were particularly less satisfied with current business. The corresponding indicator slipped into negative territory for the first time since October 2020. At that time, Germany was struggling economically with the Corona crisis. Expectations remained noticeably pessimistic. Companies complained about fewer and fewer new orders. The service providers were significantly less satisfied with the business situation and expect a further downturn. “The weakness of the industry is also pulling transport and logistics down,” explained IFO boss Clemens Fuest. Sentiment also deteriorated in trade and construction. Especially in the construction industry, “pessimism for the coming months is becoming more and more widespread.”
The IFO index sends a very clear recession signal, said Commerzbank chief economist Jörg Krämer. More than ever, he expects the German economy to shrink in the second half of the year. Other experts were also pessimistic. “The fourth decline in a row is an expression of a growing negative mood,” said LBBW analyst Elmar Völker. The already gloomy expectations had become “a bit blacker”. “More and more evidence suggests that the stagnation in economic output in the spring was just a respite before falling back into recession.” Recently, data on the purchasing managers’ index have also increased concerns that the sluggish situation in industry could spread even more to service providers.
KfW now expects GDP to fall by 0.4 percent in 2023, Commerzbank expects GDP to fall in the winter half-year and Liechtenstein’s VP Bank expects economic output to decline in the third and fourth quarters.