Germany heading for recession as business morale declines

Olaf Scholz faces a €17bn (£15bn) hole in Germany's public finances. Photo: DURSUN AYDEMIR/ANADOLU VIA GETTY IMAGES

Germany is facing its longest period of economic contraction since the turn of the millennium after a closely watched business survey showed higher interest rates and a budget crisis will continue to weigh on manufacturing next year.

Analysts said the economy is now on track for recession after business sentiment in Germany unexpectedly worsened in December.

The respected Ifo institute said its business climate index fell to 86.4 in December. from 87.2 in November. That's well below the rise to 87.8 expected by analysts, as well as the long-term average of 96.3 since 2005.

“The mood in German business has become clouded,” it said. “Companies were less satisfied with their current business. They were also more skeptical about the first half of 2024. The German economy remains weak as the year draws to a close.»

Interest rates in the eurozone are at a record high of 4%. Meanwhile, Olaf Scholz, Germany's chancellor, faces a €17bn (£15bn) hole in public finances next year alone after the Constitutional Court ruled the state budget was illegal for breaking laws prohibiting take on new debts.

< p>Carsten Brzeski, head of global macroeconomics at Dutch bank ING, said: «The financial woes of the past month have clearly left their mark on the German economy, and the country's most prominent leading indicator today shows just how difficult it will be for the German economy.» the economy will bounce back.”

Europe's largest economy shrank 0.1% in the three months to the end of September. Analysts now widely believe that trend has continued into the end of this year, pushing the economy into a technical recession, defined as two consecutive quarters of contraction.

“We expect the current state of stagnation and shallow recession to continue. ,” Mr. Brzeski added. “In fact, the risk that 2024 will be another year of recession has clearly increased.

“For the first time since the early 2000s, Germany has experienced a two-year recession, although this may be superficial.”

The Ifo index showed weakness was widespread, with industry and construction showing notable declines. Housing construction in Germany has collapsed due to rising interest rates and falling house prices, leading to the cancellation of a number of construction projects.

The business climate in the construction sector, according to Ifo, is close to a record low: about half of the companies is in decline. The sector now expects the situation to worsen in the coming months.

Paolo Grignani, senior economist at Oxford Economics, said the Ifo index painted «a bleak year-end picture for the German economy and sets the stage for a weak start to next year.»

He added that interest rate cuts are likely to come sooner rather than later to support the economy.

“This is another sign that the economy is still in a quagmire. and that a meaningful recovery in 2024 is far from complete,” Mr Grignani said.

“This is likely to further encourage the peace-loving members of the ECB's governing council to push for a relatively quick policy turnaround that, we expect will allow for the first rate reduction in April 2024.”