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Decline in German business morale fuels recession fears

BERLIN (Reuters) - German business morale plunged in July to its lowest level in more than six years, a survey showed on Thursday, in a further sign that a manufacturing crisis is pulling Europe’s largest economy toward recession.

FILE PHOTO: A general view shows the skyline of the East city center with the TV tower in Berlin, Germany, November 6, 2018. REUTERS/Fabrizio Bensch/File Photo

The data bodes ill for Germany’s export-reliant economy which has been hit hard by weaker foreign demand, trade disputes and Brexit uncertainty.

The Ifo institute said its business climate index fell to 95.7 from an upwardly revised 97.5 in June. The July reading undershot a consensus forecast for 97.1. It was the fourth monthly decline in a row and the lowest level since April 2013.

“The most important German economic indicator suggests that the German economy is heading toward a recession,” VP Bank analyst Thomas Gitzel said.

Germany’s gross domestic product is widely expected to have shrunk in the second quarter after a solid 0.4% quarter-on-quarter expansion in the first three months. Another quarter of economic contraction would be a technical recession.

Ifo President Clemens Fuest said the German economy was navigating troubled waters as companies were less satisfied with their current business situation and were also looking ahead with increased scepticism.

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“In manufacturing, the business climate indicator is in free fall,” Fuest said, with the sub-index for the goods producing sector posting its biggest drop since February 2009.

In a sign that the manufacturing recession is creeping into other sectors of the economy, business morale also deteriorated in services and trade, the Ifo figures showed. Construction was the only sector with growing optimism.

The Ifo figures chimed with a survey among purchasing managers released on Wednesday that showed the recession in manufacturing worsened in July with the performance of German goods producers dropping to the lowest level in seven years.

Ifo economist Klaus Wohlrabe told Reuters that the manufacturing recession was spreading across the broader industrial sector.

“Private consumption remains a pillar of support, but employment growth continues to weaken,” Wohlrabe said, adding that domestic demand should nonetheless provide a bulwark against trade-related headwinds in the coming months.

“However, no major gains are expected in the second half of the year either. Because with Boris Johnson and his cabinet, we have an increased probability of a hard Brexit,” he said.

German exporters are also worried that an escalating trade dispute between the United States and China could hurt their business. U.S. President Donald Trump’s threat to impose higher import tariffs on European cars is causing concern too.

“Germany is in a gray area between a marked growth slowdown and a recession,” Commerzbank economist Joerg Kraemer said, adding that the Ifo figures would feed into the wider debate about how the European Central Bank should react.

“The ECB is very likely to ease its monetary policy considerably, if not as we expect today, then by September at the latest,” Kraemer said.

ECB policymakers are all but certain to ease policy further during a meeting on Thursday, with the biggest question whether it staggers its moves over several months or opts for a big bang.

Reporting by Michael Nienaber, editing by Paul Carrel and Jon Boyle