German business mood sours as recession looms

The business climate in Germany worsened “significantly” in July, according to a key survey published Monday, as an energy crisis pushed Europe’s largest economy closer to a recession this year.

The Ifo institute’s monthly confidence barometer, based on a survey of 9,000 companies, fell to 88.6 points in July from 92.2 points last month and the “lowest level since June 2020” near the start of the coronavirus pandemic.

The pessimistic figures suggest that “Germany is on the cusp of a recession”, said Ifo president, Clemens Fuest.

The mood among businesses had “cooled significantly”, while “higher energy prices and the threat of a gas shortage are weighing on the economy”.

The fall was particularly steep in the manufacturing sector, where “pessimism regarding the coming months reached its highest level since April 2020”, Fuest said.

“Weaker global demand (and) supply chain frictions” were also weighing on the German economy, said ING analyst, Carsten Brzeski.

The strong headwinds and weak data meant Germany’s economy could have seen a contraction “already in the second quarter”, Brzeski said.

The risk that Russia could cut off its supply of gas to Germany, in retaliation for Berlin’s support of Ukraine, has prompted fears of an energy shortage at the end of the year.

Looking ahead, “there are more downside than upside risks to the outlook”, Brzeski said.

“A further escalation in the energy crisis will remain a key risk for the economy going into the winter,” he said.

Businesses’ expectations for the economy fell sharply to 80.3 points in July from 85.5 the previous month.

Their assessment of the current situation sank to 97.7 points in July from 99.4 points previously.