The Ifo business climate index delivers a "chilling finish to the annual period"
The economic climate in Germany remains grim. The Ifo Institute's business climate index dropped for the sixth time in seven months, reaching its lowest level since the initial stages of the COVID-19 pandemic. A top economist even likened it to an "apocalyptic" atmosphere.
Business leaders heading into the new year are also feeling discouraged, indicating that the incoming government may not receive much economic support. The Ifo Institute's business climate index, a crucial indicator for German economic trends, saw a significant decline in December to levels last seen in May 2020, during the pandemic-induced severe recession.
The Ifo Institute reported a surprising decrease from 85.6 points to 84.7 points in December. This marks the sixth consecutive decrease over the past seven months. Ifo President Clemens Fuest commented, "Germany's economic sluggishness has become a chronic issue." Companies might be slightly more optimistic about their current situation, but their outlook for the future is much grimmer.
Commerzbank's chief economist, Jörg Krämer, claimed this was a "cold shower" to end the year. He attributed most of the problems to German industry, which is grappling with a deep-rooted structural crisis, as evident in struggling sectors like automotive manufacturing and their suppliers. The positive effects of the European Central Bank's reduced interest rates are therefore unlikely to have a significant impact on the GDP.
Alexander Krüger, the chief economist at private bank Hauck Aufhäuser Lampe, noted that companies were barely hopeful for better business in the future. Overall, there seems to be a growing sense of doom. He hopes that the new government will set priorities for economic growth quickly.
Economic risk of recession
The manufacturing and service sectors are both running low on optimism. In construction, the business climate improved slightly, as companies had a slightly better view of their current situation. However, their optimism for the future was dampened, Fuest pointed out.
Germany experienced a modest growth of 0.1% in the third quarter but remains on the brink of a recession. There's no sign of a recovery by year's end. With Donald Trump's presidential victory in the U.S., headwinds for the economy are likely to intensify. Trump has threatened tariffs on European imports and risks further isolating the U.S. This could impact Germany, Europe's leading exporter, notably.
Economic research institutes have significantly lowered their growth projections for 2025. The Kiel Institute for the World Economy predicts a stagnant German economy in 2025, while the DIW anticipates a minimal growth of only 0.2%.
The current economic climate in Germany is causing concerns of a potential recession. With the Ifo Institute's business climate index at its lowest level since May 2020, during the pandemic-induced severe recession, there's a growing sense of economic risk.
The manufacturing and service sectors are both running low on optimism, and economic research institutes have significantly lowered their growth projections for 2025, further indicating the risk of a recession.
