Germany Faces Grim Outlook as Business Confidence Worsens

Business confidence in Germany took another hit in August, despite the economy just exiting a recession in the second quarter.

(Bloomberg) — Business confidence in Germany took another hit in August, despite the economy just exiting a recession in the second quarter.

The Ifo institute’s sentiment gauge dropped to 85.7 from a revised 87.4 the previous month, falling short of the median estimate in a Bloomberg survey. A separate report confirmed earlier Friday that gross domestic product stagnated in the three months through June, weighed down by trade.

The data on Europe’s largest economy — once the region’s trade-fired growth engine — will do nothing to quell concerns that a protracted period of weakness is on the cards. For one, Germany is the only major country whose output is forecast to shrink this year.

“the restrictive interest rate environment and the weak global economy — especially the development in China — make it difficult for us as an export nation,” Economy Minister Robert Habeck said in a statement.

He added, however that the country’s medium- and long-term growth problems are “more serious,” urging measures to boost investment and assistance for energy-intensive sectors. 

German industry had its worst month in half a year in June, and factory orders — a measure of future activity — barely increased in the second quarter. 

Ifo’s Klaus Wohlrabe told Bloomberg TV that the institute expects German output to hover around the “zero growth line.”

“The current numbers of our surveys point to the fact that there might be a slight negative growth in the third and over the fourth quarter,” Wohlrabe, who heads Ifo’s business surveys, told Manus Cranny. “But we do not expect a deep recession as many are forecasting or talking about.”

What Bloomberg Economics Says…

“A struggling manufacturing sector already risked undermining the economic recovery following the winter recession. Recent data show German industry remains soft — a sign of weak export demand, particularly from China.”

—For full note, click here

This week brought more signs of weakness as S&P Global’s Purchasing Managers’ Index for August fell to 44.7 — the lowest in more than three years, with services shrinking for the first time in eight months.

A separate poll from S&P revealed similar struggles for the 20-nation euro area, prompting investors to bet that the European Central Bank will pause its unprecedented campaign of rate hikes next month.

Bundesbank President Joachim Nagel told Bloomberg TV interview that with inflation still above 5%, it’s “much too early” to think about taking a break. At the same time, he pushed back against claims that Germany is once again turning into the “sick man of Europe.” 

“We shouldn’t underestimate the adaption capacity of the German economy,” he told Michael McKee. “Yes, we are going through some, let me say, complicated months. This is for sure. But I’m not too pessimistic.”

Yet firms in Germany are sounding the alarm. 

Hamburger Hafen saw a steep decline in shipping volumes extending into the second quarter and warned last week that it expects a “significant decrease” in revenue at its Port Logistics subgroup. Russia’s war in Ukraine, geopolitical tensions, inflation and rising interest rates put pressure on consumer and industrial demand, hindering the global economic recovery, it said.

Meanwhile, Siemens AG’s earnings fell short of analyst estimates as the company faced a drop in demand for its digital industries unit in China. And Salzgitter, one of Europe’s largest steelmakers, also reported weaker-than-expected results and suggested output will be weaker in the second half than in the first.

Earlier this week, the Bundesbank said the economy will probably stagnate this quarter as well, as high interest rates and soft global demand weigh on manufacturing. At the same time, a robust labor market, strong wage gains and moderating inflation will underpin a revival in consumer spending.

Between April and June, private consumption was flat after declining in the two preceding quarters. Gross investments grew 2.1%, while exports dropped 1.1%.

–With assistance from Kristian Siedenburg, Joel Rinneby, Zoe Schneeweiss, Sonja Wind and Petra Sorge.

(Updates with economy minister starting in fourth paragraph.)

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